For the fourth quarter, the Bloomberg Barclays Intermediate Government/Credit Index returned 0.37%, while the broader fixed income market represented by the Bloomberg Barclays U.S. Aggregate Bond Index returned 0.18%. In general, 2019 was a strong year for fixed income investors. For much of the year, sovereign bonds reacted as one would expect to weaker economic data, with bond yields broadly tracking the manufacturing surveys lower. Central bank monetary stimulus appeared to achieve policy maker goals of boosting investor sentiment and lifted all boats. Such strong returns for both traditional risk-off and risk-on assets, at the same time, is unusual.
- During the fourth quarter, the Thornburg Limited Term Income Strategy (net of fees) returned 0.48%, slightly outperforming the benchmark. The strategy returned 5.91% in 2019, underperforming the longer duration Bloomberg Barclays Intermediate Government/Credit Index return of 6.80%.
- In this market, the portfolio benefited from its underweight in duration relative to the benchmark. The U.S.-China trade war dominated rate volatility during the quarter, with tit-for-tat tariffs likely contributing to a notably contractionary manufacturing PMI. Amid mixed economic data, the Fed cut rates a third time in October. In December, the U.S. and China reached a preliminary agreement on a trade deal, lifting risk assets.
- A meaningful allocation to investment grade credit supported portfolio performance as credit spreads declined during the quarter from 153 basis points (bps) to 93 bps, despite higher leverage in the market and flat to weaker coverage metrics. Largely, we believe this to be the result of risk-on sentiment amid additional liquidity provided by global central banks. Corporate credit continues to provide investors with some additional yield in a yield-starved world.
Current Positioning and Outlook
Neither credit nor duration provide much compensation for investors relative to the potential risks. We believe defensive positioning is prudent given the asymmetrical downside potential for fixed income in a lengthy credit cycle. Last year was very good across the spectrum; 2020 is unlikely to be so indiscriminate and such high returns will likely be harder to obtain.
With this in mind, we continue to move portfolios up in quality—by rating certainly, but also largely by the defensive nature of a security’s underlying cash flows. We continue to favor the consumer over government or corporate paper, specifically ABS and MBS as consumer re-leveraging with unsecured and auto loans ticks up. Importantly, however, consumer balance sheets and general credit metrics remain strong due to a healthy job market and rising incomes.
Federal Reserve Chairman Jerome Powell stated in mid-December that the Fed intends to keep rates where they are until it sees “a significant move up in inflation that’s also persistent.” This clearly suggests policy tightening is a considerable time away. However, recent observations also tell us flip-flops are possible. If the global economy reaccelerates, bond yields may move higher, rather than fall as they did in 2019. Portfolio duration still sits toward the lower end of our historic ranges as a balanced approach to duration and credit risks is, we believe, key to success in 2020.