Short and Intermediate Duration

Short and Intermediate Duration: Q2 2022 Recap, Portfolio Actions & Outlook

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Investment Grade Portfolio Team
JUN 30, 2022

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Recap: Over the second quarter the investment grade credit market continued to be affected to varying degrees by many of the same drivers that pushed spreads wider in the first quarter, including heightened interest rate volatility, fund outflows, and increasingly determined and aggressive central bank policy to curb near-record inflation in addition to mounting fears that a more severe slowdown in economic growth or even a recession may take hold sooner than expected. Credit spreads increased each month in the second quarter as secondary trading liquidity fluctuated with the corporate bond market feeling a bit fragile throughout the quarter. We began the quarter with March’s market dislocations eventually spilling over into April as the overall pressure on risk markets, which had abated somewhat in the back half of March, resumed. The unsettled macro backdrop, persistently elevated inflation data and lingering impact of the situation in Ukraine continued to weigh on investors and sentiment. The investment grade credit market showed signs of finding its footing and stabilizing toward the end of May and the beginning of June as central bank hiking expectations were dialed back, China’s Covid lockdowns eased and new issue activity fell short of expectations. However, many of the aforementioned macro drivers coupled with the Federal Reserve’s seeming last-minute change in course from setting up the market for a 50 basis point rate hike in the federal funds rate at the June FOMC meeting to leaking a shift in their thinking two days before the decision to tee up the market for the eventual 75 basis point increase caused spreads to gap wider while risk markets melted in June to finish off a very difficult first half of the year.