We have often highlighted that higher yields (income) enhance both the total return potential and the defensive characteristics of bonds. Today, with the 30-year Treasury yield at levels that have only been exceeded 1% of the time over the last 15 years1, we believe bonds generally offer one of the most compelling combinations of income, value, and downside protection seen in years.
We can analyze this by comparing the Shape of the 30-year Treasury in two very different fixed income landscapes.
In July 2021, when Treasury rates were over 300 basis points (bps) lower, and today, to compare the total return opportunity and see just how much more attractive, and defensive, bonds are today.
Shape Management is a mathematical calculation that analyzes the return profile of a bond or a group of bonds’ future cash flows over a horizon. The below Shapes are run on a three-year horizon, and the projected returns in the tables below represent annualized returns.
30-year Treasury Shape as of July 31st, 2021:
| Date | -300 | -150 | Unchanged | +150 | +300 |
| 07/31/2021 | 14.12% | 11.45% | 1.31% | 7.56% | -15.26% |
30-year Treasury Shape today:
| Date | -300 | -150 | Unchanged | +150 | +300 |
| 05/31/2026 | 19.40% | 11.23% | 4.23% | -1.73% | -6.78% |
Sources: PTAM, Bloomberg, BlackRock Answer as of 7/31/2021 and 5/31/2026. The 30-Year Treasury is constructed with the on-the-run 30-Year Treasury. These total returns are estimated over a 3-year horizon. The bonds used to create this Shape arenotheld by PTAM clients as of the date of this presentation.
Assumptions: (1) a parallel shift in the yield curve (2) static allocation for 3 years (3) linear rate changes (4) sector specific spreads are held constant across five rate scenarios (5) reinvestment rate consistent with respective sector.
The 30-year Treasury today is vastly improved with the benefit of a higher interest rate environment. The higher income can offset some price erosion in the “rates up” scenarios, while also contributing to total return in the “rates unchanged” and “rates down” scenarios.
How does a higher rate environment impact the Shapes of PTAM Strategies?
Our Intermediate Core-Plus Strategy Shape as of July 31st, 2021:
| Date | -300 | -150 | Unchanged | +150 | +300 |
| 07/31/2021 | 2.98% | 2.91% | 1.71% | 0.25% | -1.16% |
Our Intermediate Core-Plus Strategy Shape today:
| Date | -300 | -150 | Unchanged | +150 | +300 |
| 05/31/2026 | 9.96% | 7.41% | 5.04% | 2.90% | 0.96% |
Sources: PTAM, Bloomberg, and BlackRock Anser as of 7/31/2021 and 5/31/2026. Intermediate Core-Plus Bond Strategy Shape consists of the following sectors to reflect current portfolio composition: 12% 20-Year Treasury, 6% ABS, 7% HY BB, 28% AA Taxable Muni, 10% NA CMBS Credit AAA, 12% NA CMBS XA, 12% CLO AA, 5% Non-Agency RMBS, and 8% 10YR BBB Corp. The bonds that make up Core-Plus Strategy Shape are held by PTAM clients. The Core-Plus strategy shape is not a PTAM product.
Assumptions: (1) a parallel shift in the yield curve (2) static allocation for 3 years (3) linear rate changes (4) sector specific spreads are held constant across five rate scenarios (5) reinvestment rate consistent with respective sector.
There are a couple of facts we know:
◆ With Treasury rates over 300 bps higher today than in 2021, the Intermediate Core-Plus Bond Strategy’s total return potential looks significantly better today in every interest rate scenario. Higher starting yields (income) make bonds more attractive.
◆ Additionally, with a higher yield environment, the Intermediate Core-Plus Bond Strategy has become much more defensive if interest rates move higher from here. Comparing the two Shapes above, the potential return if rates rise 150 bps today essentially ties the Intermediate Core-Plus Bond Strategy Shape’s return from 2021 if rates were to fall 300 bps. In other words, the best-case scenario for the Strategy in 2021 ties today’s shape if interest rates were to rise moderately over the next three years! Higher yields (income) make bonds more defensive.
Market volatility and unsettling headlines are a constant. However, when we focus on the underlying fundamentals of bond investing, the forward return potential in fixed income appears as compelling as it has in the last 15 years.
Taylor acts as PTAM’s Client Portfolio Manager, serving as a liaison between investments, marketing, and sales. She is responsible for investment strategy updates and portfolio communications for all PTAM’s products. Taylor additionally leads production of various portfolio and market commentary as well as dedicated strategy content. Taylor received a Bachelor of Arts from the Princeton School of Public and International Affairs from Princeton University. She is also a CFA® charter holder.
Glossary
Yield Curve refers to the U.S. Treasury yield curve rates.
Risks and Other Important Considerations
By using Shape Management, PTAM creates projections of the performance of specific bonds or grouping of bonds. These projections are not the actual performance of any bond or product. As a result, Shape Management performance in this presentation were not actually achieved by any PTAM investment or product. The criteria and assumptions underlying the projected performance may prove to be incorrect. Prospective investors should not rely solely on such projected performance and should conduct a thorough independent analysis of the investment opportunity.
The tables included throughout this presentation are provided for illustrative and educational purposes only.
Projected performance results may have many inherent limitations. No representation is being made that an investment will, or is likely to, achieve profits or losses similar to those shown. In fact, there are frequently significant differences between projected performance results and actual results subsequently achieved. Although projected performance may be useful to consider when making an investment decision. Investment decisions based on Shape Management information may not be profitable.
All projected performance is shown as net performance, which includes management fees, reinvestment of interest payments, and principal payments. More details of security selection and methodology can be obtained by emailing mutualfunds@test.ptam.com.
Investing involves risk; principal loss is possible. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in asset-backed and mortgage-backed securities include risks that investors should be aware of such as credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments. For a complete list of disclosures, please visit www.test.ptam.com.
When selecting a bond to invest in, most investors rely on what we refer to as “traditional fixed income metrics,” which are generally a combination of (1) taking a stance on whether interest rates will increase or decrease, (2) yield and (3) duration. Nearly 30 years ago, PTAM’s founders recognized the potential shortcomings in traditional bond metrics, and developed Shape Management, a math-based investment process that addresses each of these shortcomings by analyzing the risk return profile of a bond’s future cash flows. Shape Management is a mathematical calculation that analyzes the risk return profile of a bond’s or group of bonds’ future cash flows. By using Shape Management, PTAM creates projections of the performance of specific bonds or grouping of bonds. These projections are not the actual performance of any bond or product. As a result, Shape Management performance in this email were not actually achieved by any PTAM investment or product. The criteria and assumptions underlying the projected performance may prove to be incorrect. Prospective investors should not rely solely on such projected performance and should conduct a thorough independent analysis of the investment opportunity. The graphs included throughout this email are provided for illustrative and educational purposes only. Projected performance results may have many inherent limitations. No representation is being made that an investment will, or is likely to, achieve profits or losses similar to those shown. In fact, there are frequently significant differences between projected performance results and actual results subsequently achieved. Although projected performance may be useful to consider when making an investment decision. Investment decisions based on Shape Management information may not be profitable. All projected performance is shown as net performance, which includes management fees, reinvestment of interest payments, principal payments, and capital gains.
The information included is not an offer, recommendation or professional advice. Certain information contained herein has been obtained from third party sources and such information has not been independently verified by PT Asset Management, LLC. No representation, warranty, or undertaking, expressed or implied, is given to the accuracy or completeness of such information by PT Asset Management, LLC or any other person. While such sources are believed to be reliable, PT Asset Management, LLC does not assume any responsibility for the accuracy or completeness of such information. PT Asset Management, LLC does not undertake any obligation to update the information contained herein as of any future date. This email is confidential, is intended only for the person to whom it has been directly provided and under no circumstances may a copy be shown, copied, transmitted or otherwise be given to any person other than the authorized recipient without the prior written consent of PT Asset Management, LLC. Any indices and other financial benchmarks shown are provided for illustrative purposes only, are unmanaged, reflect reinvestment of income and dividends and do not reflect the impact of advisory fees. Investors cannot invest directly in an index. Comparisons to indexes have limitations because indexes have volatility and other material characteristics that may differ from a particular hedge fund. For example, a hedge fund may typically hold substantially fewer securities than are contained in an index. Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.
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