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Fixed Income Commentary: As at June 30, 2023

Source: Phil Mesman, CFA | Sam Acton, CFA
Publish Date: Jul 13, 2023
Read Time: 3 minutes
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The second quarter of 2023 saw markets broadly recover from the banking sector concerns in March. As economic growth and labour markets proved resilient, rate cut expectations shifted quickly back toward further rate hikes. The U.S. 10-Year Treasury yield climbed 38 basis points to 3.84% in the second quarter, and the front-end (U.S. 2-Year Treasury) endured even more extreme moves with an 84 basis point jump to 4.86% by the end of the quarter. Forward expected overnight rate for December 2023 also climbed 103 basis points to 5.38%.
Credit Markets absorbed the rate moves orderly and reflected the economic strength with credit spread tightening. More specifically, the ICE BofA Investment Grade Index spread tightened 14 basis points to 1.34% and the ICE BofA High Yield Index spread tightened 49 basis points to 4.25%. Despite this spread tightening, total returns for credit markets were muted due to the rate market selloff.
Our income strategies significantly outperformed during the quarter primarily due to our special situation legacy bank discounted bond (disco) investments. We saw HSBC, Barclays and Standard Chartered issue redemption notices for their discos, driving prices up sharply. These bonds have been a long-term position within the portfolios on an event-driven thesis, i.e. inefficient capital treatment and insufficient LIBOR fallback language. The team was proud to see the thesis play out as expected.
Looking ahead, while credit spreads may appear tight on the surface, bond prices are low and yields are high. We believe short duration, high quality corporate bonds have outstanding risk/reward potential from here. In addition, our team continues to focus on finding uncorrelated special situation investments that have the potential to drive capital gains in addition to attractive yields. We are also taking advantage of the recent rally in risk assets to rebalance our shorts and hedges given macro uncertainty and recession risk.

Performance table for Picton Mahoney Fortified Income Fund (Cl.F), Picton Mahoney Fortified Income Alternative Fund (Cl.F) and various indices

This material has been published by Picton Mahoney Asset Management (“PMAM”) on July 13, 2023. It is provided as a general source of information, is subject to change without notification and should not be construed as investment advice. This material should not be relied upon for any investment decision and is not a recommendation, solicitation or offering of any security in any jurisdiction. The information contained in this material has been obtained from sources believed reliable, however, the accuracy and/or completeness of the information is not guaranteed by PMAM, nor does PMAM assume any responsibility or liability whatsoever. All investments involve risk and may lose value.

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