MARKET HIGHLIGHTS

• Global equities have been mixed year to date, with emerging markets and Latin America driving gains.
• Developed international markets were flat, and U.S. large-cap equities were slightly negative, while small caps rose modestly.
• Energy was the top performer for the month and year as supply disruptions drove prices higher.
• Most other sectors declined, indicating a defensive stance and increasing correlations across global markets.
• Rising oil prices and the closure of the Strait of Hormuz created broad market pressure and weaker sentiment.
• Investors boosted hedging activity as optimism waned and demand for downside protection grew.
• Earnings growth stayed steady but faces risks from rising energy costs and fragile supply chains.
• Investment-grade corporate spreads reached their highest level since last year’s selloff.
• Mortgage-backed securities spreads kept widening as interest-rate volatility grew.
• Federal Reserve liquidity operations supported funding market stability and increased bank reserves.
• Credit conditions displayed increasing dispersion as weaker issuers declined more rapidly than stronger ones.
• Interest-rate fluctuations caused mortgage spreads to reach their widest levels since early January.
• Investment-grade spreads stayed below recession-related stress levels, showing selective rather than widespread widening.
• Corporate bond performance is anticipated to diverge more as issuer quality becomes increasingly important.
• Treasury demand should stay supported by contained term premia and ongoing policy backstops.

Equity markets experienced a clear shift toward caution over the past month as rising oil prices and the prolonged closure of the Strait of Hormuz weighed on sentiment. Global performance remains mixed year-to-date, with emerging markets and Latin America posting the strongest gains. In contrast, developed international markets are roughly flat, and U.S. large-cap stocks are slightly negative. U.S. small- and mid-cap stocks see modest gains, but sector leadership has narrowed. Energy stands out as the top performer for both the month and the year, driven by supply disruptions and higher fuel costs. Several defensive sectors, including Utilities, Consumer Staples, Industrials, Real Estate, and Materials, have performed better, while Communications, Healthcare, Technology, Consumer Discretionary, and Financials have declined. The uneven sector performance reflects a more defensive market tone, and recent declines across regions suggest correlations are tightening as markets become more synchronized.

The Federal Reserve’s policy continues to prioritize market functioning, reinforcing stability amid recent funding stresses. The Fed reintroduced reserve-management purchases late last year and extended them into early 2026, adding over $38 billion in December and nearly $50 billion in January and February. These operations increased bank reserves to above three trillion dollars and helped reduce volatility in secured funding markets, especially in SOFR, the main overnight lending rate for repurchase agreements. By stabilizing liquidity, the Fed has strengthened the Treasury market’s role as the key anchor of fixed-income pricing, even as broader economic data remains inconsistent. Term premia have stayed flat or declined, highlighting ongoing demand for safe assets despite changing macro conditions.

Credit and funding spreads continue to show a mixed picture. Investment-grade spreads have widened compared to mortgages since late last year, reflecting some softening in corporate valuations. However, the strongest corporate issuers—those whose credit default swaps trade at levels similar to U.S. government debt—remain near multi-year lows, signaling confidence in their top-tier balance sheets. Although equity markets have become more cautious, investment-grade spreads stay below levels that typically indicate recession risk, supporting the view that the recent widening is selective rather than widespread. This pattern of selectivity involves broader differences between sectors and issuers, suggesting that not all companies currently rated investment-grade will maintain that rating if conditions continue to shift.

Volatility trends have primarily affected credit and interest rate risk. As interest rate fluctuations increased, mortgage-backed securities experienced their widest option-adjusted spreads since early January, highlighting their sensitivity to rate changes. Historically, short-term increases in spreads caused by shocks have been temporary, and recent changes follow this pattern. In corporate credit, the growing difference between the highest- and lowest-risk issuers underscores the need for careful selection as dispersion expands.

The outlook remains cautious. Ongoing liquidity support and stable term premia should help stabilize Treasury yields. Corporate bonds may continue to vary in performance, making issuer selection more crucial, while mortgage spreads will depend on interest rate stability and market volatility. The broader themes of policy support, a gradual shift toward safer assets, and the increasing gap between strong and weak credits continue to influence fixed-income positioning as the year advances.

Sources: 3Fourteen Research, Strategas Research Partners LLC, and Capital Wars