- The Federal Reserve's ongoing extraordinary influence on capital markets once again played a major role during the quarter. Fed Chairman Ben Bernanke's comments sparked a sell-off in equity, bond and currency markets on fears of rising interest rates.
- Amid speculation that the Fed would soon scale back its monetary support, yields on Treasuries and corporate bonds quickly rose while high-dividend-paying sectors such as Utilities and Mortgage REITs depreciated the most. This also prompted outflows from fixed-income mutual funds, the largest three week outflows since October 2008.
- The 10-yr Treasury quickly rose to 2.60% yield from its second quarter bottom of 1.66% before ending the quarter at 2.52%.
- U.S. High Yield spreads ended the quarter almost 100 bps wider than their May 9th lows of 405bps. High Yield spreads remain well below their long-term average of 597 bps (542 bps median) at a time when defaults (2.9% issuer rate, 1.3% debt-weighted rate through June) also remain low.
- The Barclays U.S. Aggregate Bond Index fell -1.55% in June and -2.32% for the quarter; it was its worst quarter in nine years, and the Index's first year over year loss in seven years.
- TIPS capped off their worst two month performance since November 2008, losing -4.36% in may and -3.58% in June.
In summary, investors got a taste of the potential risks of investing in bonds. As investors open their June monthly statements, many will see losses they thought were not possible in their bond investments. Data released during the quarter painted a mixed economic picture. While the housing market continued to strengthen, industrial production was not very encouraging. Similarly, while consumer confidence continued to show improvement, consumer spending was uneven. Gold prices depreciated nearly 23%, the biggest quarterly decline since trading of US gold futures began in 1974.
The Credit Suisse Hedge fund Index is compiled by Credit Suisse Hedge Fund Index LLC and CME Group Index Services LLC. It is an asset-weighted hedge fund index and includes only funds, as opposed to separate accounts. The Barclays U.S. Aggregate Bond Index is the rebranded Lehman Aggregate Bond Index, a widely recognized measure of the US bond market.
Read the full report here.