Fixed Income 3Q 2024 Commentary Video Update

• Market Backdrop: Q3 featured brief volatility from the BOJ-driven unwind of the yen carry trade, followed by renewed calm as global central banks shifted toward policy easing.
• Rates & Curve: The Fed cut rates 50 bps in September, driving yields lower and steepening the curve as 2-year Treasury yields fell 111 bps, while the long end declined more modestly.
• Credit Environment: Despite labor-market concerns, credit spreads tightened 5 bps, reflecting confidence in a soft-landing scenario.
• Performance: The Johnson Core Fixed Income Strategy returned +5.38% net, outperforming the Bloomberg Aggregate’s +5.2% gain.
• Performance Drivers: Longer duration and a favorable maturity structure benefited from lower rates and a bull-steepening yield curve, with key-rate exposure focused on short and intermediate maturities.
• Outlook: Portfolios remain defensively positioned as credit valuations appear disconnected from macro fundamentals. Return expectations are more likely to align with starting yields near 4.5%, absent a severe recession.

Hello, my name is Brandon Zureick – Managing Director and Portfolio Manager.

The third quarter was characterized by several market-moving events.

Volatility briefly re-awakened as the a surprise move from the BOJ forced liquidation of the so called “Yen carry trade”.

Order was quickly restored, however, as global policy easing took center stage.

The Fed officially joined a growing list of Central Banks easing policy, electing to lower rates by 50 bps in September.

As a result, bond yields rallied, but performance across the yield curve was mixed.

The curve steepened as Two-year Treasury yields fell 111 basis points, while the long end fell just 44 bps.

Despite the Fed’s growing concern over labor market weakness, credit spreads tightened 5 basis points - an indication that the market remains confident in the Fed’s ability to act swiftly and effectively to engineer a soft landing.

The Johnson Core Fixed Income Strategy delivered a net return of 5.38% during the third quarter, outperforming the Bloomberg Aggregate Index which gained 5.2%.

The relative outperformance was driven primarily by the strategy’s longer duration compared to the benchmark, which benefited from lower interest rates.

Additionally, the strategy’s maturity structure contributed to its strong performance as the yield curve “bull steepened” throughout the quarter.

Over the past year, the team has actively repositioned the strategy’s key rate duration to focus on the short and intermediate parts of the yield curve – a segment that traditionally benefits as the Fed eases policy.

Looking forward, we continue to maintain a more defensive positioning in portfolios.

While a recession may not be likely in the very near term, credit valuation is disconnected from macroeconomic fundamentals.

Looking at several measures of economic activity, current levels of growth are more consistent with spreads about 60 basis points wider than current levels.

Finally, we believe high-quality fixed income is unlikely to deliver another year of double-digit returns unless a severe recession unfolds.

Instead, returns are likely to moderate, aligning with starting yield levels which current hover around 4.5%.