**Fixed Income Market Review: Second Quarter 2024**
The Lazard US Short Duration Fixed Income Portfolio (MUTF:UMNIX) delivered a solid 0.98% return (net of fees) in the second quarter, outperforming its benchmark, the ICE Bank of America 1-3 Year US Treasury Index, which gained 0.94%. The portfolio’s overweight positions in US Investment Grade Corporates and Asset Backed Securities contributed to its relative outperformance.
**Duration and Yield Curve**
The portfolio is targeting a modestly longer overall duration compared to its benchmark, with a focus on the 6-month and 3-year areas of the curve. This barbelled approach is designed to capture opportunities in both short-term and intermediate-term securities.
**Sector and Credit Allocation**
The portfolio remains overweight US Investment Grade Corporates and US Asset Backed Securities, while underweighting US Treasuries. This positioning is driven by a desire to favor yield in these sectors, while maintaining a positive convexity profile.
**Market Environment**
The second quarter saw US interest rates continue to rise, with the 10-year Treasury yield increasing by 20 basis points. Market participants are grappling with a range of challenges, including geopolitical risk, political uncertainty, and shifting inflation and interest rate expectations.
**Credit Markets**
Corporate credit spreads widened modestly in the quarter, driven by weaker economic data and geopolitical concerns. However, higher quality credit outperformed lower quality credit, and quarterly earnings remain solid. This suggests that investors continue to add risk in corporate credit, despite the softening in spreads.
**Outlook**
We believe that markets are at an inflection point, with the direction of interest rates dependent on whether inflation has slowed enough to allow the Fed to cut rates or if price pressures persist. We remain cautious in our approach, focusing on securities and obligors with strong attributes, such as solid business models and access to capital markets.
**Portfolio Positioning**
We are underweight corporate credit, citing concerns about valuation and the potential for an economic downturn. Within the securitized sector, we are avoiding fixed rate Agency mortgage-backed securities, which continue to underperform Treasuries.
**Conclusion**
The second quarter was marked by ongoing challenges facing the Fed and market participants. While the labor market may be weakening, inflation data has turned weaker than expected, and the yield curve remains inverted. We believe that interest rates will be volatile, driven by the interaction between fiscal and monetary policies. As such, we remain focused on navigating these challenges and identifying opportunities in the fixed income market.
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