Total Return Perspectives: February 2021


  • The Bloomberg Barclays U.S. Aggregate Bond Index (BC Agg) posted a negative return in February, falling -1.44%. A large portion of this loss stemmed from the rise in longer maturity Treasury yields. The MBS index (-0.67%) posted a better return than corporates (-1.72%) and Treasuries (-1.81%), due to its lower duration profile.
  • Economic data continued to reflect broad improvement. The headline unemployment number dropped 0.4% to 6.3%, the broader underemployment index dropped 0.6% to 11.1%. CPI rose 0.3% in the prior month, with the year-over-year number unchanged at 1.4%. Producer prices rose sharply – PPI rose 1.3% for the month, though the year-over-year number remained a relatively tame 1.7%. Retail sales also improved sharply, painting a reflation narrative as it seems the worst of the pandemic might finally be behind us.
  • The Treasury curve resumed its bear steepening pattern, now seen in 6 of the last 7 months. While 2-year yields only rose 3 basis points to 0.14%, the 5-year yield rose 33 basis points to 0.77%, the 10-year yield rose 36 basis points to 1.45% and the 30-year yield rose 33 basis points to 2.18%.
  • Corporate spreads narrowed in February and remain relatively tight. The option-adjusted spread of the Bloomberg Barclays U.S. Corporate Index fell 7 basis points during the month, ending the month at 90 basis points. The corporate sector outperformed duration-matched Treasuries by 65 basis points, although corporates did post one of the worst absolute returns among the major components of the Aggregate index due to their increased duration exposure.
  • The Bloomberg Barclays U.S. MBS Index trailed duration-matched Treasuries by 26 basis points. The sharp rise in mortgage yields caused durations to extend sharply in February. However, as convexity events go, this one did not feature the dramatic widening seen in prior selloffs, and mortgages themselves did not drive the majority of the bear steepening rate move, which is attributable to a reflation trade seen in markets across the globe.
  • Higher coupon MBS outperformed lower coupon MBS, as prepay fears abated and lower coupon MBS durations extended sharply during the selloff. Current coupon MBS spreads narrowed 3 basis points in the first six trading sessions of the week, then proceeded to widen by nearly 25 basis points between February 8 and February 25 (the day of the weak 7-year auction). A massive recovery on the last day of the month found current coupon mortgage spreads at 72 basis points by month’s end, for a widening of just 5 basis points over the month.
  • The fund (-1.38%) slightly outperformed the BC Agg (-1.44%) in February. Most of this outperformance is attributable an underweight in Treasuries, although this was offset by the relatively long duration profile across the portfolio.