May Yields Spike, Now What?


Yields on the 10-year U.S. Treasury spiked 54 basis points during the month of May. Today (June 3), the 10-year sits at approximately 2.18%.  As the table below shows, returns for many fixed income sectors, with the exception of bank loans, were negative for the month of May (using Barclays indices), and some sectors turned negative year to date.

The recent rally in rates is due to investors' anticipation of a reduction in quantitative easing by the Fed, from its current level of $85 billion in monthly asset purchases.  On May 22, Fed Chairman Ben Bernanke told Congress that the central bank could possibly cut the pace of debt purchases if officials are confident that the economic recovery can be sustained. Following his Q&A session that day, Bernanke reiterated, "tapering is a possibility, but only that."

Should the labor market improve, while at the same time inflationary pressures remain low, Bernanke opined that the Fed would "of course" end its asset purchase program, perhaps within the next few FOMC meetings.But he carefully stressed that even if the Fed begins to step down the pace of asset purchases, the move would not automatically point to the complete wind down of the program. He said a winding down would be subject to changes in jobs and inflation. If the recovery were to falter, he said the winding down would be delayed.

Last Thursday, we saw GDP numbers come in less than projected, 2.4% vs. 2.5% while jobless claims were higher than projected (prior numbers were revised upwards also).  This Friday, we will have unemployment numbers.  Again, the decision to unwind QE3 will be based on jobs and inflation. In short, we believe the recent run-up in yields is due to investor speculation over future Fed tightening policy.  Until we have a clearer picture of our economic recovery, we view this as a technical distortion in the market. At Newfleet, as we’ve done historically, we will look to take advantage of any weakness in the markets, capitalizing on opportunities at both the sector and individual security level.

Total Returns Fixed Income Sectors, May and YTD


May 2013

YTD 2013

Barclays U.S. Aggregate Bond Index



    U.S. Treasuries



    U.S. Investment Grade Corporate



        Financials Sector



   U.S. Corporate High Yield



   U.S. Bank Loans



   U.S. Agency Mortgage-Backed Securities



   U.S. Commercial Mortgage-Backed Securities



Emerging Markets High Yield



 Source: Barclays, data as of May 31, 2013.


Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.