Back to the Grind/ Kicking the Debt Ceiling Can
We will count ourselves as one of the legions that have returned to their desk this week after being disconnected from the markets during the waning day of August. There was nonetheless no lack of geopolitical/political issues for investors to contend with as the Korean peninsula remains a source of considerable uncertainty. The machinations from Washington also continue to intrigue, as the budget and debt clocks continue to tick towards a coordinated x-date. From a returns perspective, most asset classes posted positive returns during August, although there was a noticeable dichotomy in market tone between the start and end of the month. As the table below indicates, almost all domestic fixed income sectors reported gains, as the up to 18 bps decline in treasury yields resulted in a 1.1% gain in the treasury index. Hard currency EM continued to outperform, with monthly gains of between 0.8% and 1.8%, as EM sovereigns are now 8.7% better on a YTD basis. Taxable munis were the strongest FI sector during the month, as long end of the treasury curve outperformed, which flattened the curve by 15 bps from a 2s/10s perspective. Corporate and high yield performance were mixed, as spreads widened by their biggest margins in a year that has seen spreads tighten to multi-year lows. The investment grade index widened by 6 bps to +112 during the month, which nonetheless remains 15 bps tighter on a YTD basis. The moves in high yield were more dramatic as spreads widened by up to 40 bps mid-month before retracing ½ of that move. Overall high yields spreads stand near +400 bps, 40 bps better than the start of the year. From a returns perspective, investment grade reported a +0.8% return in August, while high yield was flat during the month.