Short and Intermediate Duration

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INSIGHTS : Collapsed

Short and Intermediate Duration: Q1 2022 Recap, Portfolio Actions & Outlook

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Investment Grade Portfolio Team
MAR 31, 2022

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Recap: The investment grade credit market began the first quarter somewhat impervious to the cracks that had started to become evident across markets driven by a recalibration and pulling forward of the expected rate hiking path and quantitative tightening to be followed by the Federal Reserve, among other factors. By the end of January, however, the sharp rise in interest rates, decline in equities and pickup in volatility across the investment landscape weighed on credit spreads, causing them to break out of the fairly tight range which they had been in since the end of 2020. Spreads were resilient to a degree into the second half of February until it became evident that Russia’s aggressive rhetoric would likely go beyond words and lead to an actual invasion of Ukraine, which caused front-end credit spreads to gap more than 20 basis points wider in two weeks. In the first part of March, we saw spread widening accelerate further, reaching their widest levels since the pandemic-driven disorder that drove 2020’s market freeze as the coronavirus took hold. At March’s spread wides, secondary market liquidity had noticeably deteriorated, most clearly observable in the heightened difficulty in trading SOFR-benchmarked floating-rate securities as corporate securities’ bid-offer levels broadened in general. Nevertheless, by quarter end March’s widening in credit spreads completed a round trip to actually finish tighter, in part driven by the impact of the removal of Russian U.S.-dollar securities from many of our fixed income benchmark indices. Also of note, commodity prices, led by oil, also climbed steadily throughout the quarter, accelerated to new highs spurred by the Ukraine invasion and resulting sanctions, holding implications for growth, inflation, and corporate operating margins over the quarters ahead.