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Taxable Fixed Income

Business Environment

The backdrop for fixed income securities in 2018 is best characterized as one of global policy volatility. Whether it was in response to global trade, economic growth, geopolitical factors, the Fed, or fiscal policy, the attendant course corrections and headlines contributed to a reversal of fortune for fixed income markets from the prior year. In contrast to an extended cycle marked by a lack of volatility and transactional volume, 2018 ushered in market dynamics that required participants and investors alike to become newly nimble and proactive, navigating such factors as higher interest rates, flattening of the U.S. Treasury yield curve, trade tensions, a stronger U.S. dollar, and decoupling of economic growth between the U.S. and the rest of the world.

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On the domestic front, market assumptions at the start of the year centered on strong economic growth, monetary policy normalization, and a significant increase in the deficit resulting from the Tax Cuts and Jobs Act. Ten-year Treasury note yields started the year at 2.45 percent, peaked at 3.24 percent in November, and ended the year at 2.68 percent. The Federal Reserve raised rates four times, by a total of 100 basis points, with a targeted Fed Funds rate ending the year at 2.5 . We saw an increase in the size of Treasury auctions to accommodate a deficit swelling to one trillion dollars annually. This approach held through November, until fears of slower global growth from tariffs, too-strict monetary policy, and generally overbought risk assets brought a large correction in equity markets, a rally in debt markets, and a well-publicized rethinking from the Federal Open Market Committee (FOMC).

The credit markets saw widening of spreads and underperformance globally, bearing the brunt of a “risk-off” reaction to policy uncertainty. Rather than entice value seekers, cheaper risk assets instead validated concerns about the viability of global economic growth, punctuated by lack of resolution with looming Brexit. Global high-yield, emerging markets and investment grade markets were casualties of this repricing of risk premiums, and the spread volatility kept money on the sidelines.

Taxable Fixed Income delivered modestly lower year-over-year results largely as a result of lower institutional client activity. This was especially pronounced in the fourth quarter, as debt capital market issuance became scarce and portfolio managers resigned themselves to outperforming on the downside, with a “least worst” performance objective relative to peers and indices. The extremely challenging environment in 2018 nonetheless provided opportunities for us: our franchise footprint, wallet share and mind share with clients have improved with the continued consolidation of the industry, and we are extremely well poised for success in 2019.

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Bonds Traded Globally