The securitized bond market and the Fund weathered increased interest-rate volatility in August amid competing policy signals. U.S. Treasury Secretary Bessent expanded the Treasury buyback program early in the month, providing support for longer-dated Treasuries, while Federal Reserve (Fed) Chair Warsh reiterated at the Jackson Hole Symposium, the Fed’s commitment to returning inflation to its 2.0% target.
Resilient economic data, supported in part by artificial intelligence (AI)-related spending, reinforced expectations for higher-for-longer policy rates and contributed to a flatter yield curve. The 2-year U.S. Treasury yield ended the month at 4.34%, near its year-to-date high, while the 10-year yield closed at 4.75%. Primary mortgage rates edged higher to 6.66%, reducing prepayment risk but further weighing on housing affordability.
Despite increased volatility, securitized bonds outperformed both U.S. Treasuries and investment-grade corporate bonds. Income remained the primary driver of returns as securitized credit risk premiums were generally stable. A light issuance calendar in the corporate collateralized loan obligation and commercial mortgage-backed security markets helped limit spillover from heavy supply in the broader corporate bond market. Consumer asset-backed securities was the strongest-performing sector, while residential credit lagged as investors demanded additional yield to absorb a robust supply calendar and higher interest-rate volatility.
