Strategies: Core Fixed Income; Limited Duration; Unconstrained Credit; Intermediate Duration

BBH Taxable Fixed Income Quarterly Strategy Update 2Q 2021

Co-Portfolio Managers, Andrew Hofer, Neil Hohmann and Paul Kunz provide an analysis of the investment environment and most recent quarter-end results of the Taxable Fixed Income Strategy.

Is This Sustainable?

Much like the recent temperatures in the Pacific Northwest, credit market valuations have reached remarkable extremes, and yield-seeking fixed income investors are sweating. Valuation extremes, just like a heat wave, can hang around for varying periods of time, but typically end with a storm. When the storm arrives, investors with liquid reserves fare much better than those that focused incessantly on yield. While we have no way of predicting when this low spread environment will reverse, past episodes have broken with surprising macro-economic or credit developments. Possibilities investors are watching include a sudden and sustained pickup in inflation, changes in Federal Reserve (“FED”) or European Central Bank (“ECB”) tapering policy, increasing leverage combined with slowing business volumes, or changes in relative yields for European and Asian investors. Then there are the risks we don’t even recognize as risks, the “unknown unknowns” that the recently-deceased Donald Rumsfeld famously, and perhaps insufficiently, recognized. We will address some of those possibilities in this Strategy Update, along with a few notable developments in credit markets over the previous months.

Yield-seeking from abroad helped to put a lid on rates

Rates rallied in the second quarter, with the 10-year US Treasury yield ending at 1.47%, down almost 30 basis points (0.3%) from its March 31 high of over 1.74%. Many have attributed this rally to investors revising inflation expectations downward, or the persistent dovish stance of the Fed. We suspect it isn’t entirely a market verdict on inflation, however. We believe foreign investors are a key marginal contributor to rates and spread, and it seems clear they played a large role in the rally. Net Foreign Flows into USD fixed income were negative in January and February, but strongly positive in March and April, after US rates and Euro and Yen-hedged yields increased. Foreign investors also showed a much greater willingness to buy longer maturities than in the months prior to the rate rise (see Exhibit I).

Hedging costs diminished materially as rates rose in the first quarter, and U.S. yields steepened more than overseas yields, improving the economics of buying USD notes and bonds. While European and Asian recovery is lagging the US at present, a rise in yields abroad might well cause these flows to reverse taking spreads and rates wider (see Exhibit II).


Exhibit I: Total Net Foreign Purchases – – Clustered column chart of net foreign purchases of U.S. Treasuries and of U.S. Corporate Bonds, monthly since January 2020.


Exhibit II: 10-Year U.S. Treasury Yields – Line chart 10 Year U.S. Treasuries yields hedged to EUR and hedged to JPY, quarterly since June 2016.

Both spreads (properly credit-adjusted) and our valuation framework are at all time tights

Valuations remain broadly unattractive in corporate debt, although high yield (“HY”) valuations offer far more opportunity than investment grade (“IG”). The investment grade index is the most expensive it has ever been in our valuation framework, with just 1% of the index (about 14 bonds!) pricing in our Buy zone and over 90% in our sell zone (see Exhibit III). IG spreads, unadjusted for ratings and duration, were lower than the current 81 basis points (0.81%) in the 1990s, but adjusted for credit quality and duration they are essentially at those all-time tights (see Exhibit IV). Paradoxically, credit quality trends in HY are much better, in historical context, than IG, and some reasonable valuations remain. Furthermore, street research suggests as much as $200 billion of “rising stars” (bonds upgraded from HY to IG) in the recovery, including many companies that were “fallen angels” (downgraded from IG to HY) last year, offering some potential for good security selection (see Exhibit V). Shorter, callable yields, such as bank loans and liquid callable bonds continue to make more sense than locking in spreads for longer at historic lows.

While the trend in leverage multiples between IG and HY is stark, it is worth remembering that there are some mega-cap companies (such as ExxonMobil and Boeing) with pandemic-distorted leverage skewing the IG figures (see Exhibit VI). Nonetheless, HY companies are generally more focused on reducing leverage than rewarding shareholders at present, while larger IG companies have grown accustomed to higher leverage and have re-started buybacks. Both have leverage metrics slightly inflated due to pandemic-suppressed earnings/cash flow.


Exhibit III: Percentage of IG and HY Indices in BBH Buy Zones - Line chart of the percentage of the Merrill Lynch Bank of America Investment Grade Corporate Index and the percentage of the Merrill Lynch Bank of America High Yield Corporate Index in the BBH “Buy” Zones, monthly since March 2009.


Exhibit IV: Adjusted OAS at All-Time Tights - Line chart of the average option adjusted spread (OAS) of the constituents of the Barclays Investment Grade Corporate Index and of the average OAS of the constituents of the Barclays Investment Grade Corporate Index adjusted for ratings and duration, monthly since June 1990.


Exhibit V: Corporate Index Ratings Weights – Side-by-side 100% area charts of rating weights in  the Barclays Investment Grade Corporate Index and in the Barclays High Yield Corporate Index, monthly since June 1990.

Agency mortgage-backed securities (“MBS”) on an epic losing streak

We have been unable to find good value in agency mortgage-backed securities (“MBS”) for many years. We attribute this lack of value to the Fed’s substantial purchases in this sector. Certainly, owning credit instead of agency MBS has been a superior strategy, as agency MBS have underperformed Treasuries for much of the last five years. MBS underperformance has intensified this year as Fed officials have openly mused about beginning tapering with slower purchases in this sector. While MBS will have to underperform a bit longer before they are attractive in our framework, we are hopeful that perhaps this sector might play a constructive role in portfolios in the coming years (see Exhibit VII).

Many structured sectors are attracting new investors

Structured sectors remain attractive relative to similarly-rated corporate debt, and BBH is on record pace for purchases in the first-half of about $2 billion. But the dent in issuance from last year, and elevated redemption of CLOs this year, are resulting in capital being returned to investors at unusually quick pace. Facing this wall of maturities, maintaining account weightings in structured products has been difficult even with brisk purchases of attractive new exposures. Spreads in more on-the-run structured subsectors like auto asset-backed securities (“ABS”), floorplan ABS, and conduit commercial mortgage-backed securities (“CMBS”) are at post-Crisis lows with a larger than usual proportion of issuance coming at unattractive levels. Spreads in more sheltered off-the-run sectors like venture debt ABS, recurring revenue loan ABS, mall and hospitality CMBS, and short middle market CLOs still offer attractive value amidst the drought (see Exhibit VIII).


Exhibit VI: Net Leverage - Line chart of average net leverage of the constituents of the Barclays High Yield Corporate Index and of the Barclays Investment Grade Corporate Index, monthly since December 2007.


Exhibit VII: MBS Valuations and Excess Returns (5-Year Annualized Excess Return is Only 0.13%) Combination line chart and column chart, with a line of the OAS and columns of the excess returns of the Barclays Conventional 30-year Mortgage backed Security Index, monthly since July 2016.


Exhibit VIII: ABS and Investment Grade Corporates Spreads  - Scatter chart of various corporate bonds, asset backed securities (ABS) and commercial mortgage backed securities (CMBS) and their respective market observed option adjusted spreads, as of June 30, 2021.

Pricing recovery from the pandemic is close to complete… or even overshooting

The second quarter witnessed a “resurrection” trade in structured credits markets, following on similar corporate bond sector recoveries in the most COVID-distressed industries over the last six months. Many collateral types that faced unfathomable disruption last year experienced well-received returns to the capital markets this spring. Hertz emerged from bankruptcy in June with a smaller auto fleet, profitable summer rental rates and a massive $4 billion ABS deal – the oversubscribed senior tranche priced at a remarkable spread of just 60 bps over Treasuries. Also in June, Blackstone refinanced its Extended Stay America portfolio of limited service hotels in a $2.5 billion single-asset single-borrower (“SASB”) CMBS deal that was the largest hospitality transaction since COVID. And notably, GE Commercial Aviation Services came to market with a successful securitization of engines on widebody aircraft – planes that were basically parked worldwide in mid-2020. The COVID recovery we have been positioning for in various industries has not only materialized, but now is overshooting, underpricing longer-term risks and cyclicality.

We are still finding and holding a few of the of idiosynchratic and harder-to-find opportunities (ratings ‘crossover’ names, rapid deleveraging stories, off-the-run or misunderstood credits, and high yield-for-illiquidity). Overall, however, we are increasingly focused on short, liquid credit to provide some carry. Recent purchases have emphasized non-traditional ABS, short IG corporates, shorter and middle market CLOs, loans, and callable high yield. We would own more short Treasuries if they offered any kind of yield, but since they do not, we are working overtime to get relatively safe and liquid yield for accounts.

Inflating opinions about inflation and tapering

The hottest topic in financial markets is whether the recent increase in inflation is transitory or permanent. Month-over-month CPI has been running at 5%-6% annualized rates recently, and an index of online prices, which typically lead official measures, has continued to increase in recent weeks. However, market expectations of inflation, and most economic surveys, seem to agree with the Fed’s view that above-target inflation is transitory. This is the topic of a separate publication by our colleague Jorge Aseff, “Inflation Is Here, But For How Long?”which we recommend to you.

There appears to be some disagreement among Fed members as to when the tapering of purchases and eventual rise in short rates might occur, combined with a general acknowledgement that markets will be sensitive to the onset of tapering. A parade of Fed current and former governors (Waller, Barkin, Bostic, Dudley, Kohn, Rosengren, Williams, ) have taken to media in the last weeks to reinforce how sensitive the Fed is to market expectations, and to give their own interpretations of when and how the Fed will begin tapering, when they might raise rates, and how the economy is recovering. Big picture, they are not far apart, but there is clear disagreement on the short-term path of the economy, and what tapering should look like, in terms of the mix of mortgages and Treasuries (see Exhibit IX).


Exhibit IX: Forward Breakeven Inflation Expectations – Clustered column chart of forward breakeven inflation expectations at December 31, 2020, March 31,2021, May 17, 2021 and June 30,2021 by buckets of years forward..

So far, official inflation measures are being driven by pandemic recovery

Another potential difference between persistent and transitory inflation pressures lies in the source of pressure. Past episodes of sustained inflation have arisen from wage-price spirals. In the 1970s, the last period of sustained inflation pressure in the US, oil prices pushed up CPI, but many unionized wage contracts were linked to CPI, and responded in kind, further reinforcing the trend in a vicious cycle. No such linkages exist today. Economic policy and the labor market (the evolution of wages in particular) are key to keeping expectations in check. We do not yet see evidence of accelerating wage growth in inflation dynamics.

A second source of persistent inflation, particularly for other less-developed countries, has been spiraling inflation expectations, leading to accelerated panic purchasing. We (and the Fed, it seems) believe that anchored inflation expectations are key to keeping long-term inflation under control. Thus far, market-implied and survey-based measures of inflation expectations seem stable and anchored.

Finally, the majority of inflation pressure has been coming from pandemic-sensitive sectors, further supporting the idea that current levels of inflation reflect recovery to 2019 levels rather than a permanent change in factor prices (see Exhibit X).


Exhibit X: Sources of Inflation – Stacked column chart disaggregating inflation into pandemic insensitive inflation and pandemic sensitive inflation, monthly, since January 2018.

 

The NAIC re-shuffles capital charges

Also in the second quarter, the National Association of Insurance Commissioners (NAIC) released new capital assessments on credit ratings for Life insurers, effectively making it more expensive for insurance companies to buy A rated and BBB minus-rated debt, while providing relief for BBB+ and BB+-rated debt. About $3.4 trillion of U.S. investments are subject to these charges. Given the change in the composition of debt markets, and our own active management focus on credits in the “crossover” range (BBB-BB), we certainly welcome this development on behalf of our insurance clients. Combined with the encouraging trends in BB credit described above, it is also likely to drive spreads between BB and higher-rated credits tighter (see Exhibit XI).


Exhibit XI: Changes to NAIC Risk Weight Factors – Clustered column chart of the recent changes to NAIC risk weight factors, by credit rating.

 

 

This was the quarter ESG bonds emerged as a material part of issuance

2021 is on track to be the second largest issuance year ever, trailing only last year. One part of the market, however, has vastly exceeded last year’s total: ESG bonds, a category that includes sustainability bonds, sustainability-labeled bonds (SLB) and green bonds. Together these sectors represented $235 billion of issuance in the first six months of 2021, compared to $188 billion in all of 2020. The trend is strongest in Europe, where a quarter of issuance (IG and HY) came with some sort of ESG label, with the US at 6% of IG and 9% of HY issuance, up from 3%/2%, respectively, in 2020 (see Exhibit XII).


Exhibit XII: ESG Bond Issuance - Stacked column chart of ESG bond issuance by bond category and issuance year, and a clustered column chart of ESG bond issuance by type of ESG bond and currency.

 

 

This is a rapidly evolving market, much like ESG investing, and the criteria and borders between differently-labeled bonds are still evolving. There are a few basic concepts around which these categories are developing.

Proceeds of issuance must be used for a project with specific sustainable or social goals, and segregated and tracked separately from other issuer accounts.

Process for evaluation of the project must be described thoroughly.

Reporting and KPIs for success must be clearly established.

Other trends that seem to be emerging include:

  • coupon step-downs or targeted covenant relief for achieving KPIs, which are clearly attractive to issuers, and
  • independent opinions on the strength of chosen KPIs and achievement of them.

Much like agency rating of ESG risks, there is a wide range of standards and hurdles depending on audience, and more consensus exists around structure and reporting than the merits of specific projects or issuance. In US credit markets, we are seeing significant issuance in real estate to build or refinance LEED-certified buildings, utility issuance for sustainable or less carbon-intensive energy generation, and even pipeline and exploration company issuance geared towards new energy sources, carbon capture, and safer transportation methods.

While there is still clearly room for dubious projects as companies seek strong “ESG” ratings, there is a clear concession in rates. ESG bonds are issuing with 10-30 bps lower yields than non-green alternatives, demanding even tighter spreads from an already spread-starved market, and driving average market spreads lower, as described above.

There’s always room for surprises

While we don’t see signs of emergent persistent inflation yet, and rates have calmed down, there is certainly ample room for surprises that might impact rates, spreads and/ or inflation, such as the volatility of foreign flows, potential foreign relations crises with China, the rocky trend of onshoring (for instance in chips), getting tapering right here and in Europe, and the enormous amount of Treasury and other debt that fixed income markets are asked to absorb with minimal compensation. So while we don’t currently see a sustained high inflation developing, we certainly expect more volatility in expectations along the way, with more risk of higher rates and spreads.

Overall, we have arrived at a time to ask our investors to be patient. We are caught in the scissor-blades of low spreads with increasing risk, and negligible rates on risk-free instruments. It is becoming increasingly important to pay the cost of staying liquid and ready to reinvest. Strong credit trends and decent callable short yields are postponing that moment, but higher compensation for risk will eventually be available for the patient investor.

  Total Return Average Annual Total Return
Composite/Benchmark 3 Mos.* YTD
1 Yr. 3 Yr.
5 Yr.
10 Yr.
Since Inception

BBH Limited Duration Fixed Income Composite (gross of fees)

0.57%

1.23%

3.81%

3.33%

2.52%

2.16%

4.63%

BBH Limited Duration Fixed Income Composite (net of fees)

0.51%

1.10%

3.55%

3.09%

2.29%

1.95%

4.42%

Bloomberg Barclays US 1-3 Year Treasury Bond Index

-0.03%

-0.08%

0.07%

2.67%

1.58%

1.20%

3.97%

BBH Unconstrained Credit – Fixed Income Composite (gross of fees)

2.22%

4.99%

14.78%

6.56%

7.43%

N/A

4.68%

BBH Unconstrained Credit – Fixed Income Composite (net of fees)

2.11%

4.78%

14.33%

6.14%

7.00%

N/A

4.26%

Bloomberg Barclays US Aggregate Bond Index

1.83%

-1.60%

-0.33%

5.35%

3.03%

N/A

3.25%

BBH Structured Fixed Income Composite (gross of fees)

1.63%

3.44%

9.24%

5.06%

5.21%

N/A

5.00%

BBH Structured Fixed Income Composite (net of fees)

1.54%

3.26%

8.86%

4.69%

4.85%

N/A

4.64%

Bloomberg Barclays US ABS Index

0.34%

0.18%

1.34%

3.65%

2.39%

N/A

2.64%

BBH Intermediate Duration Fixed Income Composite (gross of fees)

1.21%

0.33%

3.13%

5.42%

3.30%

3.27%

6.19%

BBH Intermediate Duration Fixed Income Composite (net of fees)

1.15%

0.20%

2.87%

5.16%

3.04%

3.01%

5.93%

Bloomberg Barclays Intermediate Gov/Credit Index

0.98%

-0.90%

0.19%

4.69%

2.63%

2.76%

5.87%

BBH Municipal Fixed Income Composite (gross of fees)

0.99%

0.48%

3.15%

4.74%

3.39%

3.68%

4.12%

BBH Municipal Fixed Income Composite (net of fees)

0.93%

0.35%

2.89%

4.48%

3.13%

3.43%

3.87%

Bloomberg Barclays 1-10 Year Municipal Bond Index

0.62%

0.36%

2.43%

3.91%

2.48%

2.97%

3.70%

BBH Core Fixed Income Composite (gross of fees)

3.02%

1.33%

6.45%

8.36%

6.85%

5.65%

6.90%

BBH Core Fixed Income Composite (net of fees)

2.96%

1.21%

6.19%

8.09%

6.58%

5.38%

6.63%

Bloomberg Barclays US Aggregate Bond Index

1.83%

-1.60%

-0.33%

5.35%

3.03%

3.40%

6.27%

BBH Inflation-Indexed Fixed Income Composite (gross of fees)

3.26%

1.96%

6.41%

6.57%

4.21%

3.63%

5.85%

BBH Inflation-Indexed Fixed Income Composite (net of fees)

3.23%

1.89%

6.25%

6.41%

4.06%

3.48%

5.69%

Bloomberg Barclays US TIPS Index

3.25%

1.73%

6.51%

6.53%

4.17%

3.40%

5.47%

Source:  BBH Analysis

Past performance is no guarantee of future results.

Gross of fee performance results for the composites do not reflect the deduction of investment advisory fees. Actual returns will be reduced by such fees. Net of fees performance reflects the deduction of the maximum investment advisory fees. Performance is calculated in U.S. dollars.

Returns include all dividends and interest, other income, realized and unrealized gain, are net of all brokerage commissions, execution costs, and without provision for federal or state income taxes. Results will vary among client accounts.

The Core Fixed Income Representative Account is managed with the same investment objectives, employs substantially the same investment philosophy as the strategy and is the account whose investment guidelines allow the greatest flexibility to express active management positions.

* Returns are not annualized

On 10/1/2020, the BBH Credit Value Composite was renamed the BBH Unconstrained Credit - Fixed Income Composite, the BBH U.S. TIPS Composite was renamed the BBH Inflation-Indexed Fixed Income Composite, and the BBH Intermediate Municipal Composite was renamed the BBH Municipal Fixed Income Composite.

BBH Limited Duration Fixed Income Composite inception date is 1/1/1990, BBH Unconstrained Credit – Fixed Income composite inception date is 5/15/2014, BBH Structured Fixed Income Composite inception date is 1/1/2016, BBH Intermediate Duration Fixed Income Composite inception date is 7/1/1985, BBH Municipal Fixed Income Composite inception date is 5/1/2002, BBH Core Fixed Income Composite inception date is 1/1/1986, BBH Inflation-Indexed Securities Composite inception date is 4/1/1997.

Index Definitions

The BofA Merrill Lynch U.S. Corporate Index tracks the performance of U.S. dollar denominated investment grade corporate debt publicly issued in the U.S. domestic market.

Bloomberg Barclays US Aggregate Bond Index is a market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed-rate, publicly placed, dollar-denominated, and non-convertible investment grade debt issues with at least $300 million par amount outstanding and with at least one year to final maturity.

Bloomberg Barclays U.S. 1-3 Year Treasury Bond Index is an index of fixed rate obligations of the U.S. Treasury with maturities ranging from 1 to 3 years.

Bloomberg Barclays 1-10 Year Municipal Bond Index is a component of the Barclays Municipal Bond index, including bonds with maturity dates between one and 17 years. The Bloomberg Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year.

Bloomberg Barclays Intermediate Gov/Credit Index is a broad-based flagship benchmark that measures the non-securitized component of the US Aggregate Index with less than 10 years to maturity. The index includes investment grade, US dollar-denominated, fixed-rate treasuries, government-related, and corporate securities.

Bloomberg Barclays U.S. TIPS Index includes all publicly issued, U.S. Treasury inflation-protected securities that have at least one year remaining to maturity, are rated investment grade, and have $250 million or more of outstanding face value.

Bloomberg Barclays US ABS Index is the asset backed securities component of the Bloomberg Barclays U.S. Aggregate Bond Index. The index includes pass-through, bullet, and controlled amortization structures. The ABS Index includes only the senior class of each ABS issue and the ERISA-eligible B and C tranche.

The Indexes are not available for direct investment.

Composites Description

The objective of our Limited Duration Fixed Income Strategy is to deliver excellent returns in excess of industry benchmarks through market cycles. The Composite includes all fully discretionary fee-paying accounts with an initial investment equal to or greater than $10 million with a duration of approximately 1.5 years. Accounts that subsequently fall below $9.25 million are excluded from the Composite. As of 10/1/2020, the Limited Duration Composite was renamed BBH Limited Duration Fixed Income.

The objective of our Unconstrained Credit – Fixed Income Strategy is to deliver excellent returns in excess of industry benchmarks through market cycles. The Composite includes all fully discretionary fee-paying with an initial investment equal to or greater than $10 million that are managed using the Unconstrained Credit – Fixed Income strategy. Accounts are invested in a broad range of taxable bonds, with the duration target approximately 4.5 years. Investments are primarily investment grade securities. Account guidelines are not materially restrictive. Account that subsequently fall below $9.25 million are excluded from the Composite. As of 10/1/2020, the Credit Value Fixed Income Composite was renamed BBH Unconstrained Credit – Fixed Income.

The objective of our Structured Fixed Income Strategy is to deliver excellent returns in excess of industry benchmarks through market cycles. The Composite includes all fully discretionary fee-paying accounts with an initial investment equal to or greater than $10 million that are managed to the Structured Fixed Income strategy. The target duration may range from 2 to 6 years. Investments are focused on asset-backed and related structured fixed income securities. Holdings are primarily investment grade but non-investment grade securities may be held. Investments may include non-dollar fixed income.

The objective of our Intermediate Duration Fixed Income Strategy is to deliver excellent returns in excess of industry benchmarks through market cycles. The Composite included all fully discretionary fee-paying fixed income accounts over $5 million that are invested in governments and corporates, with a duration of approximately 2 years. Accounts that subsequently fall below $4.5 million are excluded from the Composite. As of 10/1/2020, the Intermediate Duration Fixed Income Composite was renamed BBH Intermediate Duration Fixed Income.

The objective of our Municipal Fixed Income Strategy is to deliver excellent after-tax returns in excess of industry benchmarks through market cycles. The Composite includes all fully discretionary fee-paying municipal fixed income accounts with an initial investment equal to or greater than $5 million that are managed to an average duration of approximately 4.5 years. Portfolios that subsequently fall below $4.5 million are excluded from the Composite. As of 10/1/2020, the Intermediate Municipal Composite was renamed BBH Municipal Fixed Income.

The objective of our Core Fixed Income Strategy is to deliver excellent after-tax returns in excess of industry benchmarks through market cycles. The Composite included all fully discretionary, fee-paying core fixed income accounts over $10 million that are managed to a duration of approximately 4.5 years and are invested in a broad range of taxable bonds. Accounts that subsequently fall below $9.25 million are excluded from the Composite. As of 10/1 2020, the Core Fixed Income Composite was renamed BBH Core Fixed Income.

The objective of our Inflation-Indexed Fixed Income Strategy is to deliver excellent returns in excess of industry benchmarks through market cycles. The Composite included all fully discretionary, fee-paying domestic accounts over $10 million with an emphasis on U.S. inflation indexed securities. May invest up to approximately 25% outside of U.S. inflation indexed securities, and a duration of approximately 7-9 years. Accounts that subsequently fall below $9.25 million are excluded from the Composite. As of 10/1/2020, the Treasury Inflation Protected Securities Composite was renamed BBH Inflation-Indexed Fixed Income.

 

Risks

Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, maturity, call and inflation risk; investments may be worth more or less than the original cost when redeemed.

Asset-Backed Securities (“ABS”) are subject to risks due to defaults by the borrowers; failure of the issuer or servicer to perform; the variability in cash flows due to amortization or acceleration features; changes in interest rates which may influence the prepayments of the underlying securities; misrepresentation of asset quality, value or inadequate controls over disbursements and receipts; and the ABS being structured in ways that give certain investors less credit risk protection than others.

Investing in derivative instruments, investments whose values depend on the performance of the underlying security, assets, interest rate, index or currency and entail potentially higher volatility and risk of loss compared to traditional bond investments.

Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax.

Brown Brothers Harriman Investment Management (“IM”), a division of Brown Brothers Harriman & Co. (“BBH”), claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

To receive additional information regarding IM, including a GIPS Composite Report for the strategy, contact John W. Ackler at 212 493-8247 or via email at john.ackler@bbh.com.

Past performance does not guarantee future results

Portfolio holdings and characteristics are subject to change.

Basis point is a unit that is equal to 1/100th of 1% and is used to denote the change in price or yield of a financial instrument

Issuers with credit ratings of AA or better are considered to be of high credit quality, with little risk of issuer failure. Issuers with credit ratings of BBB or better are considered to be of good credit quality, with adequate capacity to meet financial commitments. Issuers with credit ratings below BBB are considered speculative in nature and are vulnerable to the possibility of issuer failure or business interruption. High yield bonds, commonly known as junk bonds, are subject to a high level of credit and market risks.

Opinions, forecasts, and discussions about investment strategies represent the author’s views as of the date of this commentary and are subject to change without notice. The securities discussed do not represent all of the securities purchased, sold, or recommended for advisory clients and you should not assume that investments in the securities were or will be profitable.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2021. All rights reserved. IM-09666-2021-07-13

                                        NOT FDIC INSURED                     NO BANK GUARANTEE              MAY LOSE MONEY

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Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com


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