Interest rates made a round trip during the quarter. The 10-year Treasury started at 1.45%, then in August dropped just below 1.18%, as inflationary concerns seemed to be dismissed. Shortly after, rates rebounded back to 1.52% on news that the central bank was looking to taper its bond purchases. Muni bonds (Bloomberg 1–10-year Blend) dropped 0.01% for the quarter. High Yield bonds, on the other hand, managed to post a nice quarter as the Bloomberg US Corporate High Yield Index gained 0.89%.
The three most prominent economic themes that evolved during the quarter were:
1. The Fed finally drew a line in the sand noting that it would announce a reduction in the pace of bond buying before year end and likely end bond purchases by mid-2022. Similar sentiment was shared by both the European Central Bank and the Bank of England as well.
2. The shape of the economic recovery has changed. In other words, the pace has slowed, but not for lack of demand, rather because of a pick-up in covid concerns which may be responsible for the continued supply chain challenges. Friction in the employment market, from either workers not wanting to return or not being qualified for the work, is also hampering manufacturing and transportation of goods. These issues are evidence that recovery is still in progress and that potential for further delays exists, until some of those obstacles can be resolved
3. Chinese regulatory efforts have shaken investors comfort in owning public equities of Chinese companies. However, we strongly maintain that such investments could still prove fruitful and therefore are taking a more thoughtful approach. We are examining the current price disconnect as a potential investment opportunity, in a time where there are few investments with attractive forward-looking returns.
If you have any questions or would like to discuss the quarterly update and the economic themes we are seeing, please contact us.
Please see the PDF version of this document for important disclosures.