Fixed Income & Interest Rates Weekly Update Philip G. Palumbo, CFP® | CEO & Chief Investment Officer | October 19, 2020 • Long-term interest rates have plummeted in 2020 due to the pandemic and economic uncertainty. • The 10-year Treasury yield continues to hover at historically low levels due partly to Fed rate cuts. • Interest rates could remain low as uncertainty over economic growth hangs over financial markets. • The yield curve is still flat due to falling long-term interest rates. • However, the yield curve is no longer inverted since the Fed cut rates to zero. • Economic uncertainty due to COVID-19 will likely keep interest rates across the yield curve low for some time. • Just as all interest rates have been falling for decades, so have mortgage rates. The average mortgage rate since 1990 is around 6%. • However, mortgage rates today are significantly lower due to the recession and Fed stimulus. • LIBOR is an important interest rate for global banks. Historically, it has followed the fed funds rate closely. • However, they can diverge during times of economic stress, such as during the global financial crisis. • Due to scandals around LIBOR, financial institutions are expected to find a replacement in the future. • Corporate bond spreads have widened recently due to global market volatility. • Over the past decades, corporate bonds - especially high yield - was an attractive way to generate income. • Corporate bonds are an important portfolio diversifier to stock market and government bond holdings. • This chart shows corporate bond yields by credit rating across credit cycles. • Yields were significantly higher in the early 2000s, during the crisis in 2008, and in 2016. • While lower quality yields have risen due to COVID-19, they have now stabilized. • High yield spreads widened dramatically due to COVID-19 but have now calmed. • This has happened periodically over the past cycle, most recently during the oil crash of 2014-2016. • Spreads also widened at the end of 2018 on global market concerns but recovered quickly. • This chart shows the price and total return indices for leveraged loans. • Leveraged loan prices have declined due to recent volatility. However, this also implies higher yields. • For some investors, leveraged loan yields are attractive today as part of a diversified portfolio. • The TED spread measures the difference between 3-month Treasury yields and LIBOR. • As such, it can be a measure of stress in the financial system. • In 2008, the TED spread widened significantly as the financial system began to fail. • This chart shows overnight indexed swap (OIS) rates at which banks use to borrow/lend. • These rates are based on the federal funds rate over different durations. • Similar to the federal funds rate on its own, these are watched as a sign of rising interest rates. • This chart shows the spread between LIBOR and OIS rates, both of which are used by banks. • Similar to the TED spread, this is an indicator of financial stress in the system. • Also like the TED spread, this indicator widened significantly in 2008 due to stress in the banking system. • This chart shows the spreads between benchmark rates in Europe. • Similar to TED and LIBOR-OIS spreads for the US/London, this highlights times of stress in the European financial system. • These spreads widened significantly during 2008 and the Eurozone crisis around 2011-2012. .