HOLD: 1st Quarter 2022 Portfolio Review
Driven by a continued rise in inflation, the rapid escalation of market interest rates and volatility were clearly the most prominent factors impacting performance in the first three months of the year. Hawkish commentary from the Federal Reserve contributed to a significant flattening of the yield curve. Market losses accelerated in March as war in Ukraine fueled further commodity price inflation.
The MOVE index, a measure of market volatility and indicative of the change in callable agency spreads, returned to levels not seen since the onset of COVID in early 2020. By comparison, corporate yield spreads widened 20 basis points or less than 10% of the peak to trough range over the past two years.
With all spread sector yield spreads widening significantly during the quarter, the shortest average life securities in these sectors were the best performing holdings in the portfolio. Securities out to approximately five months average life, measured at the beginning of the quarter, offered sufficient yield to offset price loss due to the rise in market interest rates. Mortgage securities were a drag on performance, as yield spreads widened and duration extended in response to the elevated inflation outlook and increasingly hawkish comments from the Fed. Lower rated credit also lagged higher rated counterparts. Average credit quality as maintained at Aa3.
In response to the move in market interest rates, the average maturity of the portfolio was allowed to contract during the quarter to minimize price erosion.
|Security Description||Price $||Portfolio Weight %|
|US TREASURY N/B 1.875 4/30/2022||100.13||5.87%|
|WELLS FARGO & COMPANY 3.45 2/13/2023||101.16||3.08%|
|US TREASURY N/B 0.125 6/30/2022||99.89||3.03%|
|CRED SUIS GP FUN LTD 3.8 9/15/2022||101.05||2.89%|
|BANK OF AMERICA CORP 3.004 12/20/2023||100.32||2.73%|
|MORGAN STANLEY 4.875 11/1/2022||101.73||2.55%|
|US TREASURY N/B 0.125 3/31/2023||98.47||2.55%|
|AMERICAN EXPRESS CO FRN 5/20/2022||100.02||2.30%|
|ATHENE GLOBAL FUNDING FRN 1/7/2025||98.44||2.21%|
|JP MORGAN USD GOVT MONEY MARKET INSTL||1.00||2.20%|
As of 03.31.2022. Cash is excluded.
From a relative value standpoint, asset backed securities and agency CMOs remain our top choices in this environment. Asset-backed holdings now represent 40.3% of portfolio market value, up from 32.6% at the beginning of the year. Agency CMOs are also attractive as wider spreads significantly increase the likelihood of outperforming equal duration Treasuries going forward. Finally, portfolio duration will remain within shouting distance of 0.50 years as we await further interest rate activity and commentary from the Fed as well as some confirmation that the peak in inflation has come to pass.