U.S. Ultra Short Plus Strategy

Janet Rilling: Welcome to the second quarter 2024 Allspring Plus Fixed Income Team recap. Bond investors saw a range of results, depending on their allocation across the yield curve and the quality makeup of their portfolio. A modest move up in yields across the Treasury curve resulted in negative total returns for high quality and long duration bonds. On the other hand, short duration fixed income segments and higher yielding sectors generally posted positive total returns. It was a classic case of the income component of bonds providing a cushion to offset modest losses from a move higher in rates. Importantly, the quarter marked the beginning of the rate cut cycle in developed markets, including cuts by the Bank of Canada and the European Central Bank. These developed market central bank cuts notably lagged several emerging market central banks that began rate cuts some time ago. Equally important, dispersion rose across developed market central banks as the U.S. Federal Reserve (Fed) remained on hold. Focusing on the U.S., once again shifting expectations changes in monetary policy by the Fed dominated the bond market’s focus. Bond yields rose sharply in April after the inflation, employment, and growth data at the start of the year suggested that the data-dependent Fed would need to keep rates higher for longer than many investors had been expecting. But during May and June, inflation data came in lower than expected and the unemployment rate rose, which allowed bond yields to modestly fall from their late April highs. Looking forward, these more recent data points provide more runway for the Fed to begin trimming interest rates later in the year. Lastly, elections around the globe added to volatility as results in many cases came in differently than expectations. The upcoming election cycle in the U.S. has the potential to add to the uncertainty in the second half of the year. Looking at credit spreads, which is the additional compensation an investor earns for bearing credit risk, they narrowed through much of the quarter, reaching some of their lowest levels in the last 15 years. By the end of the quarter, however, spreads moved back up, ending the quarter slightly more elevated than where they began. Strong demand due to high all-in yields kept spread widening in check. Further, that strong demand allowed for easy absorption of record new issuance for investment grade bonds, high yield bonds, and leveraged loans. As we look forward, we expect that credit conditions will largely remain healthy, though the Fed’s efforts to combat inflation will remain a challenge for the economy. Our current outlook suggests a more gradual rate cutting path by the Fed, which implies rates will remain higher for longer. This has led us to position portfolios with a neutral duration posture and to find opportunities to earn carry while moving up in quality and reducing our exposure to lower-rated credit sectors where valuations have gotten extreme. We slightly reduced our U.S. investment grade credit and U.S. high yield allocations and added to our U.S. securitized exposure across portfolios during the quarter. We modestly shifted our plus sector exposures in the second quarter by further reducing our exposure to global government bonds and adding slightly to European investment grade credit, given its relative value advantage over its U.S. dollar counterparts. We believe rate and spread volatility will persist. We’ve built optionality into our portfolios and have moved modestly up in quality. We will look to tactically exploit opportunities through timely adjustments to positioning using multiple levers based on our six-month outlook and an unbiased approach. Thank you for your time and please reach out to your Allspring Global Investments contact if you have any questions about any of the topics we discussed here today or to look at the Plus Fixed Income strategies in greater detail.