Taxable Total Return Fourth Quarter Review

Torsten Asmus

By Daniel Himelberger

Treasury yields experienced a precocious level of volatility during the 4th fourth arsenic marketplace participants attempted to foretell erstwhile the FOMC volition extremity the hiking cycle. At the highest connected 10/24/22, the 10-year Treasury reached 4.244%, and the 30-year roseate to 4.38% earlier falling to 4th lows of 3.419% and 3.432% respectively connected 12/7/22. Yields person since drifted higher, with the 10-year astatine 3.88% and the 30-year astatine 3.976% arsenic of 12/28/22.

You tin spot the nett effect of the volatility successful the Treasury marketplace successful the illustration below, which shows the alteration successful yields from 9/30/22 to 12/28/22.

Source: Bloomberg

Despite the volatility successful equities, spreads connected investment-grade corporates and taxable municipals dropped during the quarter. The Bloomberg Barclays US Agg Corporate Bond Index was down 29 bps to +130 bps arsenic of 12/28/22. Meanwhile, the dispersed connected the Bloomberg Taxable Muni US AGG Index declined 13 bps to +126 bps during the aforesaid time. This inclination benefited our strategy, since we person higher combined vulnerability successful dispersed securities specified arsenic taxable municipals and corporates, portion we support a little vulnerability to Treasury securities comparative to the benchmark.

During the quarter, we looked to instrumentality vantage of the higher yields by extending our duration to the 6.50–7.00 range. Wider spreads and longer durations wounded our show for astir of the year, but that vulnerability started to payment our strategy during the last quarter. The tax-free municipals that we bought astatine the extremity of Q3 besides started to assistance our strategy, arsenic municipals outperformed taxable bonds during Q4.

We continued adding to those positions astatine the opening of Q4 and are maintaining that vulnerability going into 2023. It is our content that these securities volition proceed adding worth and person little volatility than the taxable fixed-income abstraction is presently experiencing. As we determination into 2023, we volition look to proceed expanding the publication output connected portfolios by swapping retired of lower-book-yield securities.

We expect the volatility successful the marketplace to proceed into adjacent twelvemonth until determination is much clarity connected erstwhile the FOMC volition halt raising rates. It is our content that the volatility volition make charismatic opportunities specified arsenic the crossover buying into agelong tax-free municipals that helped our strategy during the quarter, and we volition proceed searching for those opportunities going into the caller year.

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Editor's Note: The summary bullets for this nonfiction were chosen by Seeking Alpha editors.

David Kotok co-founded Cumberland Advisors successful 1973 and has been its Chief Investment Officer since inception. David’s articles and fiscal marketplace commentaries person appeared successful The New York Times, The Wall Street Journal, Barron’s, and different publications. He is simply a predominant contributor to Bloomberg TV and Bloomberg Radio, Yahoo Finance TV, and different media. He has authored oregon co-authored 4 books, including the 2nd variation of From Bear to Bull with ETFs and Adventures successful Muniland. He holds a B.S. successful economics from The Wharton School of the University of Pennsylvania, an M.S. successful organizational dynamics from The School of Arts and Sciences astatine the University of Pennsylvania, and an M.A. successful doctrine from the University of Pennsylvania.David has served arsenic Program Chairman and presently serves arsenic a Director of the Global Interdependence Center (GIC), www.interdependence.org, whose ngo is to promote the enlargement of planetary dialog and escaped commercialized successful bid to amended practice and knowing among federation states, with the extremity of reducing planetary conflicts and improving worldwide surviving standards. David chaired its Central Banking Series and organized a five-continent dialog held successful Cape Town, Hong Kong, Hanoi, Milan, Paris, Philadelphia, Prague, Rome, Santiago, Shanghai, Singapore, Tallinn, and Zambia (Livingstone). He has received the Global Citizen Award from GIC for his efforts. David is simply a subordinate of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), has served connected the Research Advisory Board of BCA Research and is presently connected the advisory committee of RiskBridge Advisors. He has besides served arsenic a Commissioner of the Delaware River Port Authority (DRPA) and connected the Treasury Transition Teams for New Jersey Governors Kean and Whitman. Additionally, helium has served arsenic a committee subordinate of the New Jersey Economic Development Authority and arsenic Chairman of the New Jersey Casino Reinvestment Development Authority.