Short & Intermediate Duration: Q1 2021 Recap, Performance & Outlook

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Short & Intermediate Duration: Q1 2021 Recap, Performance & Outlook

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Short & Intermediate Duration Portfolio Team
MAR 31, 2021

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Investment Grade Credit

Recap: Against a backdrop of a more effective government-managed vaccine rollout to fight the coronavirus and signing into law of a $1.9 trillion fiscal relief package by the new administration, which caused market expectations to rise regarding the pace of economic growth in 2021, exceeding earlier forecasts, the first quarter saw the investment grade credit market remain in a bit of a tight range in terms of credit spread movements over the quarter. Credit spreads were flattish in January then edged a little tighter in February before drifting wider in March as improved prospects for near-term growth and inflation pushed interest rates sharply higher and the yield curve steepened. This combined with an unexpectedly busy new issue calendar to push spreads a little wider on balance over the first quarter. We saw issuers ramp up new issue activity for several reasons, including telecommunications companies financing recent wireless spectrum purchases, an increased pace of M&A-related issuance and a rush to tap the market before interest rates climbed higher. The reopening or reflation trade continued to be the dominant force for markets as the scrutiny over positive fourth-quarter earnings reports and what they mean for corporate fundamentals took a backseat to macro developments. The risk-on tone to markets certainly benefited equities and commodity prices over the quarter but left the investment grade credit market representing somewhat of a laggard with March’s slight shift wider in spreads although levels closed the first quarter still not far from their post-financial crisis tights, leaving little room for meaningful tightening.