Skip to main content

July 2024




Taxable Strategies:
Changes on the Horizon?



Michael Taila Managing Director
David Krouth Portfolio Manager
  • April may have been the near-term peak in Treasury yields. 
  • Extend portfolio maturities to capture income and increase forward-return potential. 
  • Credit fundamentals remain sound.

Macroeconomic and monetary policy sentiment shifted during the second quarter as leading indicators fell from February highs, and downward progress on inflation was evident, but slower than expected. This led the market to believe the higher-for-longer interest rate outlook gained a foothold. The change in market perception dampened expectations for Fed rate cuts to as few as 0-to-2 by year-end. The volatility that developed resulted in increased Treasury yields. For example, the 10-year U.S. Treasury bond increased about 60 bps to 4.7% by late April, but because of weaker-than-expected data (e.g., consumer spending and CPI), yields settled at 4.4% by quarter-end. As confidence emerges, a loosening of policy could be warranted (chart 1). 

 

Chart 1: Q2 and YTD Returns 
 

Source: Bloomberg, as of June 30, 2024. 

Past performance is no guarantee of future results.Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index. Information is subject to change and is not a guarantee of future results.

 

City National Rochdale currently has a 10-year U.S. Treasury range of between 4.1% and 4.6%. Most taxable asset classes closed out 1H2024 in positive territory (chart 2).

Chart 2: 10-Year Treasury Yield 

Source: Bloomberg, as of June 30, 2024. 

Past performance is no guarantee of future results.Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index. Information is subject to change and is not a guarantee of future results.

 

 

Interestingly, longer maturity bonds are beginning to outperform shorter tenors, including T-Bills. As prevailing yields remain attractive across many segments of the taxable fixed income markets and confidence re-emerges on rate cuts this fall, we are positioned neutral to our various benchmarks. Should geo-political risk or fluctuating data impact the market, we maintain the flexibility to respond. Selectively adding duration by pushing further out on the curve into longer maturity strategies could add value to investor portfolios. Rotating from T-Bills, for example, which have elevated reinvestment risk, into medium-term bonds could lock in compelling yield for an extended period and potentially provide enhanced total return. 

The technical and fundamental backdrop has led to U.S. investment grade (IG) and high yield corporate (HYC) quality spreads remaining near multi-decade lows. Continued, albeit moderating, economic growth has supported issuer credit profiles so far this year. For example, interest coverage ratios, which are a standard measurement of debt serviceability, are healthy, while default experience among HYC is running slightly below long-term averages. With gross issuance up roughly 25% YoY through Q2 and total fixed income bond flows positive, this supply and demand balance has helped support bond prices. Within the IG space, option-adjusted spread as a % of total yield is below historical averages and reflects net demand for bonds. We expect current conditions to persist in the short run, but an unexpected drag on the economy, coupled with volatility as the November elections near, could lead to spread widening. Thus, research due diligence is critical, but we would see market dislocation as a potential entry point for investors. 




More from the Quarterly Update

Put our insights to work for you.

If you have a client with more than $1 million in investable assets and want to find out about the benefits of our intelligently personalized portfolio management, speak with an investment consultant near you today.

If you’re a high-net-worth client who's interested in adding an experienced investment manager to your financial team, learn more about working with us here.