Published Date: August 6, 2025
Author: HANetf
The U.S. Treasury curve experienced a steepening during the second quarter of 2025. Yields decreased between 9 to 19 basis points (bps) in the short and intermediate part of the curve. This is contrasted with the long-end of the curve, where yields on 20- and 30-year Treasury bonds increased 18 and 20 bps, respectively. The steepening of the curve detracted from relative performance as the Fund maintains an overweight position at the long-end of the curve.
As a result of the Treasury curve steepening, the greatest detractors from relative performance were Long U.S. Treasuries and Taxable Municipals, both of which largely price off the long-end of the Treasury curve.
The greatest contributors to Fund performance were sectors that price off the short or intermediate part of the curve and benefited as rates fell.
Commercial Backed Securities (CMBS), Residential Mortgage-Backed Securities (RMBS), and High Yield (HY) Corporates benefitted the most from both falling rates and spreads tightening. Collateralized Loan Obligations (CLOs) also benefitted as spreads tightened during the quarter.
These sectors largely fall into our Interest Rate Defense allocation, and we are pleased that strong performance from these sectors largely offset some of the relative underperformance within our Interest Rate Offense sectors.
Macro Outlook
Our favored sector allocation and yield curve positioning generally remains unchanged. In fact, we believe the underperformance year-to-date only makes the go-forward potential even more attractive. Taxable Municipals that price off the 20-year part of the curve and 20-year U.S. Treasuries are still our preferred form of longer-dated exposure, or Interest Rate Offense, given their relatively high yield and attractive yield curve roll potential.
Regional Banks, Non-Agency CMBS, and Agency CMBS continue to offer more attractive value relative to other fixed income sectors. These sectors still comprise some of our favored Interest Rate Defense. Where spreads are near the tighter end of range on a historical basis, such as with HY Corporates and CLOs, we are primarily buying shorter structures, therefore providing higher yields but with potentially less price sensitivity in the event spreads widen, as an additional form of Interest Rate Defense. With Shape Management guiding our investment decisions, we are excited about the attractive relative and absolute potential performance that lies ahead and believe investors are primed for some attractive return potential.
Additional sources available upon request. All data as of 30/06/2025.
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