Facing a slowing manufacturing backdrop, escalated trade tensions and growing uncertainties, the Federal Reserve delivered two well-telegraphed interest rate cuts during the third quarter. Bond investors were the direct beneficiaries of a more dovish-leaning Fed as the Bloomberg Barclays Aggregate Index gained 2.27% on the quarter, led by strong performance in the corporate sector. U.S. Treasuries also performed well, as longer duration bonds caught a bid.
We are comfortable with the general health of corporate America and we are not falling into the imminent recession camp. Low interest rates are helping to keep debt payments manageable. Coverage ratios of our largest companies remain above 6x, while there has been deterioration within some of the smaller and mid-cap entities. It has been noted that expansions do not die of old age, rather from rising rates or economic excesses. We do not see any glaring excesses.
Our call is for Treasury yields to remain range-bound with a slight upward bias as the rates market may have priced in a recession and a worsening trade war. We are slightly underweight duration across most mandates, primarily the 3-5 year area of the curve. Our investment grade portfolio managers are finding value in certain segments of the auto ABS markets, non-agency MBS and non-agency CMBS markets. We will maintain an overweight in Bank and Finance as supply within this sector remains subdued and the fundamentals sound.
Read the full Q3 2019 Fixed Income Review: