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2024 Year-End US Bond Market Review

Commentary by Senior Fund Manager & Director of Fixed Income, Jeffery Elswick | January 24, 2025

MARKET REVIEW  U.S. BOND MARKET

A lot of historical firsts -- or at least firsts dating back to the Second World War -- have been achieved across the U.S. bond market over the last few years. 2022 saw its worst year ever across the broad U.S. bond market, with close to double-digit losses. The Bloomberg Barclays U.S. Aggregate Bond Index (AGG) lost slightly over 13% that year. 2022 also saw, for the first time in four decades, two consecutive calendar years of negative returns across the broad U.S. bond market and largely flat to negative absolute returns over three of the last six years. 2023 saw a move to the highest level in U.S. money market rates since the year 2000 as the Federal Reserve (Fed) increased its targeted Fed funds rates to close to 5.50% to slow inflation levels. 2024 was no different, as the market saw for the first time in decades money market rates decline by 100 basis points, or a full percentage point, as the Fed began to reverse policies of the prior two years, yet simultaneously long-maturity U.S. Treasury yields increased by approximately 100 basis points. In 2024, the 30-year maturity U.S. Treasury bond yield rose from approximately 4.00% to 4.85%. Additionally, credit spreads over U.S. government bonds in both investment-grade and high-yield corporate bonds declined to levels not seen since the start of the great financial crisis in 2007, in another year of outstanding performance for the fixed income credit-spread sectors. When all was said and done, 2024 saw broad U.S. bond market returns in positive territory, but still at levels that at best broke even relative to U.S. inflation levels.

In the larger and better-followed fixed-rate coupon segment, the Bloomberg Barclays U.S. Universal and U.S. Aggregate bond indexes returned 2.27% and 1.48% respectively in 2024. Corporate investment grade bonds outperformed U.S. government sectors. The smaller and less often less-followed floating-rate coupon indexes bettered the fixed-rate segments and saw returns between 5.50% and 6.50% in the year. The lower end of this range generally tracked toward the very high end of credit quality such as the U.S. government only sectors such as the Bloomberg Barclays U.S. Treasury floating rate index. The higher end of this floating rate returns of 6.50% generally encompassed the riskier sectors, including some investment grade credit risk and the securitized sectors, such as the Bloomberg Barclays U.S. floating rate credit index.

CASH & MONEY MARKET SECURITIES

Like the previous two years, the U.S. economy outperformed consensus expectations in 2024 as growth surprised to the upside again. Labor markets continued to generate robust gains, the consumer continued to spend, and inflation -- while still somewhat elevated -- continued to slow to a lower pace. As a result, cash and other money market sectors outperformed the broad U.S. bond market with returns around 5.0% to 5.25%. The Fed began to reduce its targeted money market rates in the third quarter as inflation began to decline closer to long-run targets. The Fed determined rates above 5.50% were no longer warranted and reduced targeted money market rates by a cumulative 100 basis points during the last four months of the year from approximately 5.35% to 4.35%. However, even in the face of these rate cuts, the cash and money market sectors delivered positive real returns over inflation in 2024 and bettered the broad U.S. bond market indexes in absolute returns three out of the last four years.

TREASURY SECURITIES

The Treasury market produced a very diverse set of returns, ranging from 5.50% to negative 8.50%, depending on yield curve sector and subsector details. The best performing portion in Treasuries was the floating-rate coupon area with returns in the 5.50% area, which benefited from high money market rates relative to the previous decade’s averages. The fixed rate, shorter-maturity sector (i.e., maturities between one to four years), saw the next best returns around 3.50%, as returns were largely in line with income generation. The two-year U.S. Treasury Note yield essentially finished 2024 where it began, resulting in income generation as the sole return metric. The Treasury-Inflation Protected (TIPs) returned approximately 1.50%, broadly. TIPs benefited from the continued higher than average inflation environment in the United States. The worst areas in total returns across Treasuries were the remaining fixed-rate nominal U.S. Treasury sector with returns lower the further out the maturity curve one went. The intermediate portion of the U.S. Treasury yield curve saw returns in a range between zero to 1.0%, the 10-year sector negative returns of approximately 4% and the 20-year plus sector saw returns of negative 8.50%. The yield on the 30-year U.S. Treasury bond increased from 4.00% to around 4.85% over 2024 leading to meaningful lower valuations for that sector of securities. Within the AGG index, the U.S. Treasury sector returned just over 0.50% in 2024.

Treasury-Curve

Source: FactSet

Overall, 2024 was a challenging environment for the aggregate U.S. Treasury sector due to three reasons. First, the federal government has begun to run permanent budget deficits of over $2 trillion a year and a cumulative national debt over $36 trillion, resulting in historic amounts of supply of new securities issued and marginally poor supply-demand fundamentals. Second, above-average economic activity and output in the United States, in some respects due to apparently semi-permanent federal government fiscal policies. Lastly, the continued sticky inflation levels in the United States. All this resulted, for the first time in modern history, where in one 12-month period, the Fed lowered money rates by 100 basis points. That pushed T-Bill yields lower by a corresponding 100 basis points, but the yields across 20-year and 30-year Treasury securities rose at the same time by close to 100 basis points. 

RESIDENTIAL MORTGAGE-BACKED SECURITIES (RMBS)

The U.S. Agency RMBS pass-through sector outperformed duration adjusted Treasuries for the second year in a row. That might not sound like such a feat, but prior to 2023 the space only outperformed this metric once over the previous decade. The sector delivered absolute total returns of 1.20% in 2024, which also was in line with the overall AGG index. On a duration-adjusted basis, the sector outperformed Treasuries by approximately 0.40%, which again was the second year in a row for its outperformance. Broadly, the conventional Fannie Mae and Freddie Mac securities outperformed the fully government guaranteed Ginnie Mae sector by approximately 50 basis points over the year, which by historic standards is a large amount of relative outperformance for such a short time horizon. This outperformance in conventionals over Ginnie Mae sectors resulted from better prepayment results. In terms of coupon performance, coupons at or below 4.50% meaningfully underperformed higher coupon securities. The higher income generation in the higher coupon pools was the determining factor in better returns over the year as the lower coupon sector trailed in performance due to lower income generation and a lack of rate rally particularly in the intermediate maturity yield curve. Lastly, the 15-year collateral pools bettered the longer-maturity 30-year pools seemingly in correlation with the overall performance in the rates market. In other words, as the short and intermediate portions of the Treasury yield curve outperformed the longer-maturity category, the shorter 15-year RMBS pools delivered higher returns than the longer 30-year pools. Generally, all the sectors mentioned above produced positive absolute total returns however, unlike long-maturity Treasuries that turned negative.

Regarding the harder to quantify and slightly less-ubiquitous U.S. agency RMBS CMO sector, the space saw a wide range of performance returns over 2024 depending on the myriad of structures and mortgage pool characteristics outstanding. Broadly, the sector delivered positive total returns and in the case of the more on-the-run front sequential and PAC structures saw returns highly correlated to the larger pass-through space. The higher volatile structures in CMOs such as interest-only strips, principal-only strips, Z’s, etc., saw as is quite the norm a large range of returns depending on individual security performance.

Moving on to the diverse non-agency RMBS sector, returns were broadly positive and generally outperformed their larger and more liquid agency RMBS sectors. The higher credit quality sector in non-agency RMBS just as the prime jumbo and qualified mortgage pool space broadly produced returns between 1.25% and 1.75%, in-line with the higher coupon, 30-year U.S. agency collateral pools. The lower credit quality sectors such as non-qualified mortgage pools generally saw slightly higher returns in large part due to the continued solid fundamentals across the U.S. housing market, a solid economy and credit spreads tightening like other credit-spread sectors. The riskiest sectors such as non-performing and re-performing RMBS pools saw the highest levels of total returns in 2024, even though generally these returns trailed that of the corporate high-yield space. As a data point, credit spreads over U.S. government bonds generally in RPL senior securities rallied (declined) between 150 to 200 basis points in 2024. Very similar to some of the other credit-risk sectors across U.S. fixed income, this spread compression aided total returns in this sector quite nicely. It is unlikely to repeat in 2025, even if the housing market continues to power on, due to the absolute level of spreads now sitting at relatively low levels by historical standards.

ASSET-BACKED SECURITIES (ABS)

The ABS sector returned between 4.75% and 5.25% during 2024 including the higher-quality ABS sub-sector of the AGG index finishing at 4.95%. ABS outperformed both the AGG index and Treasurys on a duration-adjusted basis. The ABS sector benefitted from a shorter-maturity profile on average and the short end of the yield curve broadly outperforming the intermediate and long end. Additionally, ABS was aided with a move lower in credit spreads and outperformance broadly by the credit-spread sectors. Credit spreads were stable across most loan collateral types even as investment sentiment continued to triangulate around a soft landing and continuation of the credit cycle. 2024 saw very little negative fundamental credit impairments as the consumer generally remained on solid footing. Even the subprime auto collateral ABS pools saw no material issues with bond credit downgrades or worse bond defaults despite a slight degradation in loan pool delinquency metrics. The sector continued to be one of the sectors in the U.S. bond market with the lowest levels of volatility.

COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS)

Despite investor concerns across commercial real estate fundamentals, CMBS produced outsized relative returns for a second year in a row. The CMBS subsector in the larger AGG index returned 4.32% in 2024, following 5.42% in 2023. This 2024 performance bettered the overall AGG index by more than 300 basis points and more than 275 basis points over Treasuries on a duration-adjusted basis. There was a large range of performance and returns across the different credit segments in CMBS. The lower-rated sectors in CMBS generally had a very large range of returns and was very dependent on individual security selection relating to how the underlying CRE pools performed regarding actual credit fundamentals. CMBS securities that had challenging or worsening credit performance in the underlying mortgage loans broadly underperformed and in some cases by material amounts. Securities seeing improved credit fundamentals on the other side saw sizable positive returns and outperformance and, in some cases, saw total returns close to double digits.

COLLATERALIZED LOAN OBLIGATION (CLOS)

CLOs turned in another solid year of performance and returns. The floating rate coupon and low-duration characteristics of the sector insulated the sector from the volatility in fixed-rate Treasury yields that occurred throughout the year. While the Fed began to lower money market rates in the second half of the year, floating-rate indexes such as SOFR (the “new LIBOR”) remained high enough to aid CLOs in attractive income generation. In 2024, CLO returns ranged from 6.0% to 12.0%, with AAA-rated securities at the low end of the range and BB-rated securities at the high end. The CLO sector benefitted from another year of “risk-on,” with bond investors’ desire to obtain income and an expectation of a reasonably solid credit cycle. For the first time in several years, the CLO sector began to see a notable increase in refinance activity. In the fourth quarter, loan issuers and CLO managers began to obtain potential interest savings with investors strong demand for allocations to the space. This refinance activity – colloquially termed negative convexity by bond investors – began to slowly lower total returns in the sector as higher coupon legacy CLOs began to be refinanced out of the market and replaced by broadly lowering interest paying new CLOs. This market characteristic will certainly be something to monitor for investors in 2025.

INVESTMENT-GRADE CORPORATE SECURITIES (CORPORATE IG)

The Bloomberg Barclays US Corporate IG Index returned 2.13% in 2024, which was better than both the AGG index and Treasury bonds. After adjusting for maturity and duration differences, the IG sector outperformed Treasurys by an outstanding 2.40% and outperformed the AGG by 1.50%. The short and intermediate portion of IG outperformed longer maturities correlated to the move in the Treasury yield curve of somewhat lower short yields, but higher 10- and 30-year maturity yields over the course of the year. Like the Treasury sector, the range of returns between these different maturity profiles were meaningfully wide. The corporate IG intermediate sector of the AGG index delivered aggregate returns of 4.25%, while the long-end sector lost nearly 2%. Corporate IG banks and financials outperformed other industries as the sector began the year still somewhat cheap on a valuation basis due to 2023’s regional bank stress. This sector has a more intermediate maturity profile relative to industrials and utilities, which broadly have larger long-maturity profiles. In credit quality, 2024 was another year characterized as “risk-on,” meaning that riskier credit exposure provided better returns. The AA-rated subsector of the AGG Corporate IG index produced an aggregate total return of 0.66% and a duration-adjusted return over Treasurys of 1.24. The lower-rated BBB sector returned 2.70% over Treasurys, or 3% adjusted for duration.

Regarding valuation metrics, the solid blue line in the chart shows corporate IG credit spreads over government bonds beginning 2024 below long-term averages – about 100 basis points over Treasurys compared to the average of 150 basis points. In 2024, in correlation to corporate IG’s relative outperformance, credit spreads declined even further.

US-Corporate-Bonds

 Source: Bloomberg & Barclays Capital

In the fourth quarter they reached record lows of 70 basis points over Treasurys. In the last week of 2024, corporate IG saw marginal reversals and profit taking from these historic lows, but even so, spreads finished 2024 at only 80 basis points over Treasurys. The story is somewhat different with respect to all-in corporate IG yields due to a reflection of where Treasury yields finished. The solid red line in the chart reflects current corporate IG yield-to-maturities and the dotted red line is the long-run simple average dating back to the late 1990s. Unlike spreads, all-in yield-to-maturities spent all of 2024 somewhat above the long-run averages and finished the year at approximately 5.40% in aggregate, or about 80 basis points over the average. While overall credit spreads remained well below long-run averages reflecting rich valuations relative to many other fixed income sectors, all-in yields continued to be a positive characteristic supporting solid investor demand. Until there is some meaningful catalyst to reverse this positive sentiment, we look for investor demand to remain solid in 2025 for corporate IG.

New issue publicly listed supply across the corporate IG space came in at a healthy $1.6 trillion, represented by approximately 2,150 transactions. This represented the second highest level of gross new issue supply over the past decade for the sector.

US-New-Issue-Supply

 Source: Bloomberg

Media commentary and investors focused on the expanding private credit space, while the publicly listed corporate IG sector continued to reflect the most efficient market for high quality corporate issues to raise debt financing in the world. The year also saw regulators direct the corporate IG sector (as well as several other sectors across U.S. fixed income) move to one-day settlement of trades. This change was successfully navigated, and the market remained surprising resilient with overall solid liquidity and reasonably stable bid-ask spreads throughout the year.

HIGH YIELD CORPORATE SECURITIES (CORPORATE HY)
HY-Corporate-Bonds
US-Corporate-Bonds

The corporate HY sector was again a star performer in 2024. The Bloomberg Barclays U.S. HY index returned 8.10%, which followed 2023’s phenomenal 11.05%. On a duration-adjusted basis, the sector outperformed Treasurys by an eye-popping 500 basis points. Like other sectors, lower-duration profiles generally delivered better returns across corporate HY, but not by the same magnitude. For example, corporate HY intermediate maturities delivered returns between 8.0% to 8.25% where longer-maturity returns were between 6.0% and 6.25%. Longer-maturity Treasury and corporate IG returns produced negative absolute total returns over the year. Broadly, the lower in credit quality in corporate HY, the better the returns. The CCC-rated category returned approximately 15.0% while the BB-rated category returned around 6.30%. B-rated returned around 7.40%. Corporate HY benefited nicely from the continued economic and credit cycle improvement, even in the face of constant investor worries about both. But continued declines in credit tiering across risk level is challenging this investment climate. Irrespective of company or industry specifics, most BB-rated bonds have continued to trade toward similar valuations. While this has resulted in solid returns over the past year or two, it also results in ever-diminishing risk-reward valuations as the credit cycle ages and smaller amounts of compelling relative value opportunities at the BB-rated sector.

At the end of 2024, the Bloomberg Barclays Corporate HY sector finished with an average spread of 2.85% over Treasurys and at levels very close to all-time lows relative to IG spreads. The environment for all-in yield-to-maturities is somewhat different than the corporate IG space. In corporate HY, yields remain at levels somewhat consistent to the prior several years. However, unlike corporate IGs, corporate HY yields finished 2024 at levels below averages since the great financial crisis in 2006-08.

US-HY-Maturity-Profile
HY-LTM

Additionally, corporate HY spread differentials from corporate IG are rich compared to long-run averages. The spread finished 2024 at approximately 200 basis points, technically not record lows but at a level that historically has marked levels of resistance for further compression. While spreads begin 2025 at levels difficult to characterize as favorable, if all-in yields remain reasonably high, the space should continue to see investor support. That said, we look to be ever judicious in where to allocate investments. In fact, based on the incredible spread compression, 2024 ended with better investment opportunities in higher-risk areas in terms of credit ratings and more volatile industries such as energy.

In reference to underlying credit fundamentals, 2024 was reasonably borrowing. There always are some credit events over a year, but defaults in the corporate HY space remained well within long-run averages. As can be seen in the attached chart, corporate HY default rates finished the year below 3.0%. Additionally, the maturity profile across corporate HY had very manageable levels of maturities to refinance. In fact, the next several years also have manageable levels of maturities to refinance.

New issue here came in at a solid $325 billion across the public corporate HY sector. This result was higher than the prior two years, but simultaneously only in sixth place relative to the last 10 years. The sector was stable throughout 2024 in terms of new supply issuance, overall liquidity and stable bid-ask spreads especially at the higher-quality BB category. To essentially capsulate 2024 for corporate HY in terms of spreads or supply trends, it can be described as aggressive conservatism. Investors’ continued reach for income and yield consistently dictated rather steadfast allocations toward the higher end of corporate HY, while at the same time, rich valuations as seen by historically low levels credit spreads meant investors seemed to add at almost any price exposure to the corporate HY names and industries with “safer” expectations while also avoiding areas of concern.

US-HY-New-Issue-supply

 Source: Bloomberg 

2025 MARKET OUTLOOK

The U.S. economy continues to expand, but at a slower rate than in prior years. Our forecast is for the U.S. economy to grow much closer to its long-run potential, which is around 4% to 4.50% in nominal growth or approximately 2% to 2.50% adjusted for inflation. We expect inflation to move closer to averages seen over the last several decades, around 2%, even though tail winds for lower global inflation over the last four decades are becoming headwinds. This is likely to translate to somewhat higher structural global inflation over the next several economic cycles, so U.S. inflation in this current cycle should trend closer to 2.50%. We expect the Fed to continue lowering money market yields in 2025 by approximately 100 basis points to around 3.50%. We also note, however, that we believe the U.S. economy begins 2025 with a larger-than-usual potential to deviate from its long-range potential in either direction. The amount of uncertainty as the new year begins is unusually high due to President-Elect Trump becoming President Trump and his potentially meaningful policy changes relating to tax, trade and immigration. Other issues leading to large uncertainty are geopolitical concerns (Chinese, Russian and U.S. relations at the top of the list), U.S. fiscal spending ramifications, and several major European nations beginning the year with stalled output. Some of Trump’s potential policies (taxes and regulation in particular) should be very constructive for future economic growth, while others such as trade and immigration pose much more risk to the current economic cycle. Large U.S. government fiscal deficits, while a long-term negative, have supported economic expansion. The question is whether this large fiscal support will continue into 2025? Many of these potential events result in material unknowns, leading to our view that the next year (or two) have larger potential outcomes in both directions from a base case expectation. We assess the odds of the Fed needing to reverse course in its rate cutting policy as very low, at least in 2025. We have strong confidence that 2025 will see U.S. money market rates spend more time in the 3.0% to 4.0% range rather than over 4.0%.

Regarding the U.S. bond market, we begin 2025 with a base expectation eerily like our 2024 forecast. We look for the overall bond market to produce nominal total returns around 5.00%. We expect the yield curve to steepen, with yields for maturities less than five years to decline somewhat in correlation with the Fed’s lower money market rates. However, exactly consistent with our 2024 expectations, we do not expect fixed-rate coupon yields for longer maturities to decline much at all. In fact, our base case expectation is for the yield on the 10-year Treasury to remain over 4% and perhaps closer to 5% for 2025. Ever-growing government debt levels should increase Treasury supplies and solid-enough growth should keep longer maturity yields at least 100 basis points higher than shorter maturity yields. In fact, the 30-year average yield differential between the two-year and 30-year Treasury maturities has been slightly over 1%. 2025 starts with this spread around half that. We look for the curve to steepen over the year much closer to this multidecade level of 1% or even higher, translating to a 30-year Treasury yield of 5% or higher.

Like many, we are very focused on the negative supply characteristics for the Treasury market as federal deficits and total debt levels reach all-time highs. It is not out of the question that the cumulative U.S. debt will be close to $40 trillion by the end of 2025 -- a level never seen before and an amount requiring an ever-imposing issuance calendar by the Treasury Department to finance it.

While our base expectation is for the Fed to lower money market rates over the year – which all else equal lowers return potential for floating rate coupon securities – we look for the floating rate sector to produce solid overall total returns once again, albeit lower than the prior several years due to lower SOFR rates. With money yields remaining around 3% in 2025, overall income generating in the floating rate space will support positive returns. 2023 and 2024 returns bettered the larger fixed rate space. 2025 may not see a similar outcome due to lower money rates, but we still expect the floating rate space to see very competitive returns relative to fixed rate, especially as we do NOT expect to see a decline in longer-maturity fixed rate sector. In short, we look for overall floating rate coupon space to see somewhat lower, but still positive, returns in 2025 relative to prior two years but these returns will still be competitive compared to the fixed rate space.

Credit spreads over government bonds began 2025 at historic lows across most areas. It will be challenging for credit spreads to decline meaningfully lower. At the same time, all-in yields remain elevated relative to the last 20-year averages due in large part to Treasury yields. We expect these all-in yields to support investor demand, and in turn the 2025 return expectation across the majority of the credit sectors should remain reasonably solid. It would take some significant catalyst, such as the U.S. economic expansion ending, for credit spreads to increase materially. Our base case expectation is for the credit markets to remain largely on solid footing and the broad sectors across credit, while not possessing large chances for meaningful outsized outperformance, also most likely positioned to deliver modestly better returns than U.S. government securities.

One sector we are constructive on is RMBS. We began to turn more positive for the RMBS sector in 2024 and begin 2025 with an expectation of solid relative value for the sector both for the U.S. agency space as well as most areas in the non-agency sector. RMBS will certainly continue to be correlated in terms of aggregate returns with the intermediate Treasury sector. However, the sector should benefit from a lower level of interest rate volatility, spreads over Treasurys largely around long-run averages (unlike at historic lows across the credit space) and we expect a better investment climate for historically one of the largest investor bases to begin to reinvest – U.S. banks and other financial institutions. The non-agency RMBS sector additionally should continue to benefit from a relative solid credit metrics across the U.S. housing market.

Important Information

Frost Investment Advisors, LLC is registered as an investment adviser with the SEC.

Economic factors, market conditions and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark.

This presentation is furnished for informational purposes only and is not investment advice, a solicitation, an offer to buy or sell, or a recommendation of any security to any person. Opinions, beliefs and/or thoughts are as of the date given and are subject to change without notice. The information presented in this presentation was obtained from sources considered to be reliable, but its accuracy and completeness is not guaranteed.

Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which could have the effect of decreasing historical performance results and therefore could be materially different from that of the portfolio. Investors cannot invest directly in an index.

This material represents the portfolio manager’s opinion and is an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice or specific recommendation of securities.

Bloomberg U.S. Aggregate Index- The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, fixed rate agency MBS, ABS and CMBS (agency and non-agency). Provided the necessary inclusion rules are met, U.S. Aggregate-eligible securities also contribute to the multi-currency Global Aggregate Index and the U.S. Universal Index.

Bloomberg U.S. IG is a subindex within the U.S. Universal Index.

Bloomberg ABS is a subindex within the U.S. Universal Index.

Bloomberg RMBS is a subindex within the U.S. Universal Index.

Bloomberg U.S. Universal Index - The Bloomberg U.S. Universal Index represents the union of the U.S. Aggregate Index, U.S. Corporate High Yield Index, Investment Grade 144A Index, Eurodollar Index, U.S. Emerging Markets Index, and the non-ERISA eligible portion of the CMBS Index.

Bloomberg High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.

Bloomberg U.S. Mortgage-Backed Securities (MBS) Index tracks fixed-rate agency mortgage-backed pass-through securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).

The Bloomberg U.S. Credit Index measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government related bond markets.

The Bloomberg U.S. Credit 1-5 Year Index measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government related bond markets with maturities of one to five years.

High Yield Corporate Bond Index* is a rule-based alternatively weighted Index designed to capture the performance of selected issuers in the U.S. high yield corporate bond market that are deemed to have attractive fundamental and income characteristics.

Bloomberg US Corporate Index measures the investment grade, fixed-rate, taxable corporate bond market.

The Bloomberg US Floating-Rate Note Index measures the performance of USD denominated, investment-grade, floating-rate.

Residential Mortgage-backed Securities (RMBS)- debt-based assets constructed by a government agency such as Fannie Mae and Freddie Mac or a non-agency investment-banking firm.

Asset-backed Securities (ABS)- finance pools of familiar asset types, such as auto loans, aircraft leases, credit card receivables, mortgages, and business loans.

Commercial Mortgage-Backed Securities (CMBS)- Commercial mortgage-backed securities (CMBS) are fixed-income investment products that are backed by mortgages on commercial properties rather than residential real estate. CMBS can provide liquidity to real estate investors and commercial lenders alike.

Collateralized Loan Obligation (CLOs)- A Collateralized Loan Obligation (CLO) is a type of security that allows investors to purchase an interest in a diversified portfolio of company loans.

Investment-grade- Bonds with a rating of BBB- (on the Standard & Poor's and Fitch scale) or Baa3 (on Moody's) or better are considered "investment-grade.” 

Credit Spread, also known as a yield spread, is the difference in yield between two bonds with similar maturities but different credit qualities.

The Secured Overnight Financing Rate (SOFR)- a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.

London Interbank Offer Rate (LIBOR)- the global reference rate for unsecured short-term borrowing in the interbank market. It acts as a benchmark for short-term interest rates. It is used for pricing of interest rate swaps, currency rate swaps as well as mortgages.

Effective duration calculates the expected price decline of a bond when interest rates rise by 1%. The value of the effective duration will always be lower than the maturity of the bond.

Treasury Inflation-Protected Securities (TIPS)- securities whose principal is tied to the Consumer Price Index (CPI).

Duration Adjustment Basis - a formula commonly used in bond valuations, expresses the change in the value of a security due to a change in interest rates. In other words, it illustrates the effect of a 100-basis point (1%) change in interest rates on the price of a bond.

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This commentary is as of Dec. 31, 2024, for informational purposes only and is not investment advice, a solicitation, an offer to buy or sell, or a recommendation of any security to any person. Managers’ opinions, beliefs and/or thoughts are as of the date given and are subject to change without notice. The information presented in this commentary was obtained from sources and data considered to be reliable, but its accuracy and completeness is not guaranteed. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not indicators or guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification strategies do not ensure a profit and cannot protect against losses in a declining market. All indices are unmanaged, and investors cannot invest directly into an index. You should not assume that an investment in the securities or investment strategies identified was or will be profitable.

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