Total Return Perspectives: October 2021

Interest rates were mixed in October, as shorter maturity yields rose while longer maturity yields fell. The dramatic flattening in the yield curve reflects the market expectation that the Fed will begin tapering its bond purchase program imminently and has pulled forward expectations for rate hikes once the taper is completed.


  • The Bloomberg U.S. Aggregate Bond Index (BC Agg) returned -0.03% in October. The Bloomberg U.S. Corporate Index (+0.25%) led the major investment grade sectors as its skew toward longer maturities benefited from the rally in long Treasuries – corporate spreads were actually 3 basis points wider. Treasuries (-0.07%) were mixed as short and intermediate maturities weighed on returns, while mortgage-backed securities (MBS) lagged (-0.19%) due to their key rate exposure to these shorter maturities. The option-adjusted spread of MBS actually narrowed 3 basis points, reflecting increased interest rate volatility as market participants begin to position for a post-QE environment.
  • Economic data continued to be dominated by elevated headline inflation while growth began to slow. The latest headline CPI increased to 5.4% (with core CPI +4.0%) year-over-year, which continues to trend well above the Fed’s targeted level of 2.0%. The market has started to accept that a significant portion of inflation is persistent, which is supported by the Underlying Inflation Gauge (UIG) hitting its all-time high – just over 4.0% as of October’s publication. UIG was designed by the New York Fed specifically to measure persistent inflation.
  • The yield curve flattening was quite severe. The 2-year yield rose 20 basis points to 0.49% and the 5-year yield rose 19 basis points to 1.19%. However, the 10-year yield rose just 3 basis points to 1.56%, and the 30-year yield fell 15 basis points to 1.94%.
  • The fund (-0.27%) underperformed the BC Agg (-0.03%) in October. The underperformance is attributable to a significant underweight in longer maturity assets, which were the only positive contributors to the index return in October.

Standardized performance can be viewed here: Monthly and Quarter End Performance


  • Despite the rise in short-term rates, yields remain incompatible with current measures and future forecasts of inflation. While our defensive posture in rates has hampered performance in October, we see no material reason to embrace low yields at these levels. We expect to remain active in TIPS and asset-backed securities, while corporate and MBS spreads remain relatively tight and are unlikely to move materially from current levels. Volatility in fixed income markets will continue to be elevated and will center around market forecasts for how Fed policy evolves in the months (and years) to come.

Eddy Vataru
Chief Investment Officer – Total Return

John Sheehan
Vice President & Portfolio Manager

Daniel Oh
Vice President & Portfolio Manager

Learn More about the Total Return Fund

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