In July, the Securitized Income Fund generated positive total returns and outperformed agency mortgage-backed securities and investment-grade corporate bonds. U.S. interest rates moved sharply higher during the month, while market volatility increased. Following a brief period of calm, renewed geopolitical tensions in the Middle East and stronger-than-expected economic data contributed to higher inflation expectations. In addition, elevated capital markets debt issuance, particularly to finance artificial intelligence (AI) infrastructure investments, created a challenging backdrop for fixed-income markets.
Against this backdrop, the Federal Reserve left its policy rate unchanged at its July meeting. However, continued dissents in favor of tighter monetary policy, combined with Federal Open Market Committee (FOMC) Chairman Warsh's "less is more" communication approach, reinforced uncertainty surrounding the future path of policy. U.S. Treasury yields rose across the curve, with longer-dated maturities underperforming shorter-dated securities as the yield curve steepened.
Income remained the primary driver of returns as securitized credit risk premiums were generally stable during the month. Investor demand readily absorbed a robust new-issue calendar across consumer asset-backed securities (ABS), residential mortgage credit, and office-related commercial mortgage-backed securities (CMBS). Demand was more selective in the corporate collateralized loan obligation (CLO) market, where investors favored transactions with lower relative exposure to the software sector. Meanwhile, the data center sector remained in focus as elevated corporate debt issuance related to AI infrastructure spilled over into the securitized market, contributing to modest price weakness in select ABS and CMBS backed by data center assets.
