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

Taxable Fixed Income Quarterly Update Q4 2020

December 31, 2020
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.

Round-Trip to a Changed World

If you had been lucky enough to sleep through 2020, and woke up simply to compare the yield-to-maturity on your BBH portfolio at year-ends 2019 and 2020, you might conclude nothing much had happened. Market valuations and opportunities are broadly similar to last January as we start 2021. However, we begin this year with 70 percent of global bond supply yielding less than one percent, a new President, a new Treasury Secretary, a changed majority in Congress, a very different growth outlook in many economic sectors, massive amounts of new government stimulus and corporate borrowing, and a long list of uncertainties very different from what was top of mind a year ago.

While we are glad to put last year behind us, it was good to us in a few respects. 2020 was process-affirming, and we generated strong investment performance. We have always understood that periods of high volatility present us with unusual opportunity, and last Spring was one of those moments. In this Quarterly Strategy Update, we’ll discuss how our process guided us through 2020 and how we view our opportunity set today. Then we’ll discuss some of these uncertainties likely to drive the fixed income markets in 2021 and beyond, and the outlook for some of the key economic sectors to which our portfolios are exposed.

US. Treasury Curve graph is a line graph depicting fourth quarter changes to the US Treasury rate yield curve. One curve is as of 9/30/2020 and the other curve is as of 12/31/2020. The curve rose an average of 18 basis points across the medium and long end of the curve but was little changed on the short end.

2020 Credit Spreads graph is a line graph depicting credit spread changes for 2020. The four spread series are corporate high yield, corporate investment grade, CMBS rated A-BBB and ABS AA-BBB. The graph depicts that all four spread series peaked in March but subsequently drifted slowly tighter over year.

Valuations: there and back again

March 2020 was the worst month for investment grade (IG) credit ever – replacing September 2008. In the middle of March, credit valuations went from expensive to intensely attractive in about 10 trading days. In our process, large volatility in valuations typically leads to more trading activity. Our trading volume in credit was up 40% over 2019, as we purchased corporates in the summer and then rotated into new issuance of structured products (asset-backed securities, commercial mortgage-backed securities, collateralized loan obligations) in the fall. These sector allocation changes, driven entirely by the valuations of individual bonds, were the primary driver of strong excess returns in 2020. Sector exposures led returns through the first, while positive security selection improved performance in the second half of the year as volatility diminished.

Credit Market Performance Net of Treasuries is a bar chart comparing historic worst months of credit market performance (net of Treasuries) to March 2020’s performance. Performance for ABS, CMBS High Yield and Municipals are depicted. ABS’ worst month is -3.8% vs -5.5% in March 2020. Corporate’s worst month is -8.0% vs -11.1% in March 2020. High Yield’s worst month is -16.5% vs -14.0% in March 2020. Municipal’s worst month is -5.8% vs -6.2% in March 2020.

BBH 2020 Credit Activity is a bar chart depicts BBH 2020 Trading activity by sector. Trading activity increased in March of 2020, coinciding with market volatility.

Percentage of BofA ML U.S. Corporate Bond Index in BBH “Buy” Zone graph is a time series of a) the % of the Bank of America/Merrill Lynch Investment Grade Corporate Index in the “Buy Zone” of the BBH valuation framework, and b) the option-adjusted spread of the same index. The x-axis runs from December of 2019 to December of 2020. The chart depicts that index-level corporate valuations made a round trip from the beginning of the year to the end, with less than 10% of the IG index in our “buy” zone at the start and end of 2020, but nearly 90% in the buy zone in late March (please refer to footnote 1).

Investment Grade Corporate Index Valuations is a bar chart comparing dispersion of valuations of investment grade corporate bonds at December 2019 and December 2020. The chart divides the Index into buckets of Gross Mean Reversion (please refer to footnote 2). The y-axis of the chart is the number of securities and the x-axis depicts buckets of Gross Mean Reversion. There are more securities in the “greater than 500 basis points of Gross Mean Reversion” bucket on December 2020 than there were on December 2019.

As shown in the above chart on the left, index-level corporate valuations made a fast round trip from the beginning of the year to the end, with less than 10% of the IG index in our “buy” zone1 at the start and end of 2020, but nearly 90% in the buy zone in late March.

However, a security merely being above our buy level is only part of the story. It is also important to know how far into the buy zone its valuation has improved. For that we must introduce another output of our model, one we call Gross Mean Reversion or “Gross MR”.2 Think of this as the spread plus a modeled return, or a measure of cheapness or intensity in valuation.

Higher is better.

While the number of securities with positive “Gross MR” in the index (i.e. “Buys” or “Holds” in our framework) was about the same at the beginning and end of 2020, there was somewhat greater dispersion in valuations. For instance, there were more securities with higher Gross MR levels at the end of the year than at the beginning of the year, as shown in the above chart on the right.

Not only do some of the opportunities in corporate valuations have potentially higher returns, but structured products continue to offer higher spreads than at the beginning of the year, and tend to out-yield corporates at shorter durations. Investing in select corporate valuation opportunities and structured products are two important components of improving the potential excess return of our client portfolios. You can see the better opportunity set we find today reflected in our representative core account by looking at the weighted average Gross MR in the portfolio at each month opening through the year (see the chart on the right). The portfolio’s weighted average Gross MR was 2.18% (or 218 basis points) at the beginning of 2020, ranged over 10% at the beginning of April, and stands at just under 3% as we start 2021.

Modeled Gross Mean Reversion of Rep. Core Account is a bar chart depicting account level Gross Mean Reversion* in the BBH representative core account from January 1, 2020 to January 1, 2021. Gross Mean Reversion was 218 basis points on January 1, 2020, peaked at 1,068 basis points on April 1, 2020, and
was 296 basis points on January 1, 2021.

* In our framework, a bond is a ‘Sell’ if Gross MR is negative, and a “hold” or “Buy” when it is positive, and the Gross MR measurement is an estimate of excess return (spread plus additional modeled costs and return potential). If you are interested in learning more about our valuation model, please get in touch with us.

Putting this all together, we show the total modeled return of the core representative portfolio in the chart on the following page, including the dramatic drop in Treasury yields early in 2020, and the fall in spreads through the rest of the year. The portfolio’s total modeled potential at the end of the year is about the same as January 2020, but the spread components are much larger and the Treasury-equivalent yield is much smaller. Note that the blue and yellow components of the chart add up to the portfolio yield, the yellow and green components add up to the Gross MR, while the green portion contains our modeled assumptions. While a yield of just over 3 percent for December 2020, and a Gross MR modeled return of 3.7%, doesn’t sound high, it is significant when the Bloomberg Barclays US Aggregate yield stands at 1.13%, and 70% of the broader fixed income universe yields less than 1%.

Rep. Core Account Portfolio Modeled Potential Return Decomposition is a bar chart depicting the decomposition of Modeled Potential Return. Each bar is segmented into Treasury-Equivalent Yield (%), Portfolio OAS (%) and Modeled Return Potential (%). There is a bar for each month from January 1, 2020 to January 1, 2021. The portfolio’s total modeled potential is about the same in January 2020 as it is in January of 2021, but the Portfolio OAS component is larger, and the Treasury-equivalent yield is much smaller in January of 2021 than it was in January of 2020.

Moving down to the sector level, we can show how our propensity to shift between sectors and individual names may improve the return on the portfolio. Corporate IG Index spreads are below 100, but if you look at some of the larger exposures in our core representative account, you can see securities from various subsectors with much higher spreads, many from structured sectors. This is particularly true in the highest quality ratings (see chart on the next page).

Low treasury yields and index spreads are discouraging for fixed income investors. But, as last year shows, if yields are volatile, the potential for much better returns are still there.

Fiscal policies are likely to be supportive, but tax increases are probably on the horizon

Overall, we are optimistic about economic growth prospects once the pandemic begins to abate, given massive fiscal and monetary stimulus, along with pent-up consumer demand and healthy balance sheets. However, unprecedented government stimulus and fear about near term recovery brings a lot of market uncertainty and rapid revision of economic and sector expectations, so we expect volatility along the way.

Another stimulus bill was passed in December after Trump’s last-minute flirtation with a veto. It includes additional direct payments and unemployment insurance, as well as additional Paycheck Protection Program (PPP) funds and related tax breaks, aid to airlines and mass transit, “medical ‘surprise billing’ ban”, and a variety of other programs, detailed in the accompanying exhibit. In addition, Congress will certainly be contemplating another bill that pays an additional $1,400 to eligible taxpayers in the first weeks of its new term.

Option Adjusted Spread (OAS) of Various Subsectors is a four-panel bar chart depicting the option adjusted spreads of various subsectors in the representative core account. The subsectors depicted are the top 40 subsectors in terms of market weight. Each panel represents a different credit rating level. Venture Debt ABS (BBB-rated, 600 basis points), Single Borrower Fixed CMBS (A-rated, over 600 basis points), Single Borrower Floating CMBS (AA-rated, over 300 basis points) and Collateralized Loan Obligation (AAA-rated. over 175 basis points) are the widest subsectors in each panel.

The new stimulus is likely to have a similar effect to that in the summer – simultaneously increasing consumer saving and spending. Combined with the potential of vaccines to end the pandemic, stimulus is likely to be supportive of credit in the coming months.

Components of the Stimulus package – This table lists the components of the stimulus bill passed in December of 2020

A Democratic majority will certainly bring some new policy proposals that could weigh on markets, such as financial transaction taxes, significant tax increases on investments and high-income earners, and additional financial regulation. However, since the Democrats have only the slimmest possible majority and still a handful of more conservative House members, we expect Biden to preside over a largely centrist policy agenda.

The Fed credit purchase programs are over. Long live the Fed credit purchase programs.

The Fed’s special lending facilities ended December 31st, and the Federal Reserve (Fed) returned unused risk capital to the Treasury. A provision in the stimulus prohibits the Fed from reviving identical programs without congressional approval. However, this provision is symbolic, since the Fed could make small alterations, rename the programs, and still be able to deploy as much as $750 billion in purchasing power. The Fed, determined not to provoke another “taper tantrum” (2013), also announced it would continue Treasury and mortgage-backed security purchases of at least $120 billion per month “until substantial progress has been made” towards its inflation and unemployment goals. With Yellen as Treasury Secretary, we expect much improved cooperation over Fed programs, although perhaps with some social policy strings attached.

Can this torrid demand for credit continue?

The most important sources of marginal demand for U.S. dollar (USD) credit are foreign investors and mutual funds, both of which have gained share in USD credit over the past decade. Both continued to be positive factors in credit prices in 2020, and we expect this trend to continue. Each of these sources of demand is driven by different dynamics.

Facilities table - This table lists the Federal Credit Purchase Programs, whether they are continuing, and their respective expiration dates.

Foreign investment demand tends to correlate with two related factors: hedging costs and London Interbank Offering Rate (LIBOR)/short-term rates.3 Lower hedging costs tend to be correlated with greater foreign inflows, since the majority of flows are hedged on a long-term basis. Lower LIBOR rates, as the primary element of funding and hedging costs, also tend to be correlated with higher foreign demand for U.S. assets.'

Fed policy is likely to remain accommodative, and the Fed programs for banks aimed at funding costs have not expired, so we expect LIBOR and hedging costs to remain low this year. The Fed will also continue buying Treasuries at a rapid pace for the foreseeable future. These trends are supportive for funds and foreign flows into U.S. credit markets.

Fixed Income exchange traded funds (ETFs) are generally used as exposure vehicles by institutional money managers and large pools of capital. When a large amount of money needs to be deployed or removed from the corporate bond market, ETFs are the vehicle of choice. For this reason, ETFs tend to be sensitive to market sentiment, and will take in money in periods of risk-seeking or shed assets in times of risk avoidance. Given that the U.S. credit markets are still relatively high yielding, the baseline trend in ETF flows is positive.

However, given ETF’s role as exposure tools, we would not be surprised to see elevated volatility should there be rapid changes in the economic environment, or building investor expectations that the Fed may overshoot its inflation goals.

YTD Fund Flows is a bar chart depicting 2020 fund flows in various credit market sectors, as a percentage of assets under management. The highest fund flow is 27.4% in High Yield ETFs, and the lowest fund flow is -23.9% in Loans. The “All Fixed Income” category is a flow of 6.8%.

Speaking of the i-word…

After the run-off election on January 5th, rates spiked, breakeven inflation rates on inflation-indexed bonds increased to just over 2% for 10 years, and the yield curve steepened, a “reflation trade”. Investors have rightfully experienced some fatigue worrying about non-existent inflation since the Global Financial Crisis (GFC). Nonetheless, we believe there may be some reasons to worry about a stronger inflation trend over the coming decade.

First, we are in the midst of unprecedented global expansionist policy coordination, both monetary and fiscal. It isn’t at all clear how much borrowing and spending governments need to do to provoke inflation, but the world’s central banks and governments have certainly stepped up to the plate. The Fed has explicitly targeted average inflation, suggesting they would tolerate periods of higher inflation in order to achieve an average above-two percent for the coming years.

Second, and in contrast to the immediate post-GFC period, globalization is in retreat, and there are significant domestic cost drivers that may play a role in creating inflation. Supply chains are onshoring rather than offshoring, which is likely to push up prices in developing economies. The same goes for stricter environmental and social policies, higher minimum wages, and expanded welfare programs. Finally, record wealth levels and strong asset prices may fuel pent-up demand, and the banking system is well-capitalized and fully capable of a role in the transmission of easy monetary policy.

Breakeven Inflation Rate and Yield Curve is a two series line chart. The series are 10-Year Breakeven Inflation Rate and the Spread Between 2-year and 10-year Treasuries. The time period depicted is September 30, 2020 to January 8, 2021. The 10-Year Breakeven Inflation Rate rose from 1.6% to 2.1%. The 2-year and 10-year treasuries rose from 0.55% to 0.98%.

Housing agencies – never mind!

Until recently, clients have been asking us what will happen to the mortgage agencies. Expectations for the agencies to exit conservatorship probably ended on December 15th, when Treasury Secretary Steven Mnuchin indicated that he would not sign a consent order to make the agencies private again. The Director of the Federal Housing Finance Agency, Mark Calabria published new liquidity rules for agencies as private entities on December 17th, but Calabria is not likely to remain in his post even through the comment period. Meanwhile, the Biden administration’s focus appears to be on extending the mortgage accommodations embedded in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (set to expire on January 31st), and implementing new programs for equitable access to home finance using the profits remitted from the agencies – suggesting that privatization is on the back burner, and the government is more likely to use the agencies as an instrument for social policy subsidies. Agency mortgage-backed securities should remain government-backed credit, at least for the next few years.

What do business managers expect?

Speaking with management teams, we are a little surprised at the optimism we see even in some of the harder-hit sectors. Most pandemic-affected sectors have substantial liquidity and are looking past current conditions to a robust recovery ahead. Spending is surprisingly strong in less-affected sectors. On the following page we provide a summary of the outlook for some of the sectors with larger portfolio exposures.

When will the pandemic end?

On everyone’s mind, of course, is whether the vaccine roll-out will improve from its unpromising start and bring an end to this pandemic by the summer. We believe there is significant pent-up demand among U.S. consumers, and we expect dining, shopping, and traveling activity to pick up sharply as soon as cases appear to taper for a few weeks. Further, there is limited appetite among politicians to strengthen “lockdown” policies in all but the most dire circumstances, so the optimism about economic growth within 2021 seems appropriate.

2020 was a difficult year in many ways, and we are glad to see the back of it. We also would welcome a less chaotic political environment, should that come to pass. But we are very pleased at how our process took us through the gyrations of 2020. Over the past few years, when we’ve built up allocations to Treasuries and cash, or kept our credit exposures in shorter, higher-yielding bonds, clients have asked if we still expect the kind of overshoot in credit that is embedded in our valuation model. Given all the Fed stimulus and low rates around the world, will we enter an era of spread stability? The answer is an emphatic “no”. Bigger government programs and bigger policy uncertainties probably mean greater volatility. This was an extraordinary credit cycle, but by no means the last. As you’ve seen, that bodes well for sticking to our process of purchasing durable credits4 when they are available at attractive yields.

Industry Notes - This table provides brief notes on fundamental factors affecting key industries.

Andrew P. Hofer
Portfolio Co-Manager
Neil Hohmann,PhD 
Portfolio Co-Manager
Paul Kunz
Portfolio Co-Manager

  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) 1.36% 3.32% 3.32% 3.09% 2.65% 2.15% 4.66%
BBH Limited Duration Fixed Income Composite (net of fees) 1.30% 3.07% 3.07% 2.85% 2.43% 1.94% 4.45%
Bloomberg Barclays US 1-3 Year Treasury Bond Index
0.05% 3.10% 3.10% 2.72% 1.89% 1.29% 4.04%
BBH Unconstrained Credit – Fixed Income Composite (gross of fees) 5.04% 4.62% 4.62% 5.48% 6.39% N/A 4.27%
BBH Unconstrained Credit – Fixed Income Composite (gross of fees) 4.93% 4.21% 4.21% 5.06%
Bloomberg Barclays US Aggregate Bond Index
0.67% 7.51% 7.51% 5.34% 4.44% N/A 3.75%
BBH Structured Fixed Income Composite (gross of fees 2.36% 3.21% 3.21% 4.54% 4.80% N/A
BBH Structured Fixed Income Composite (net of fees) 2.28% 2.86%
2.86% 4.18% 4.44% N/A 4.44%
Bloomberg Barclays US ABS Index
0.36% 4.52% 4.52% 3.60%
2.87% N/A 2.87%
BBH Intermediate Duration Fixed Income Composite (gross of fees) 1.40% 7.28% 7.28% 5.15% 4.05%
3.53% 6.27%
BBH Intermediate Duration Fixed Income Composite (net of fees) 1.34% 7.01% 7.01% 4.89% 3.79% 3.27% 6.01%
Bloomberg Barclays Intermediate Gov/Credit Index 0.48% 6.43% 6.43% 4.67% 3.64% 3.11% 5.98%
BBH Municipal Fixed Income Composite (gross of fees) 1.11% 5.30%
5.30% 4.68% 3.93% 3.99% 4.21%
BBH Municipal Fixed Income Composite (net of fees) 1.05% 5.04% 5.04% 4.42% 3.67% 3.73% 3.95%
Bloomberg Barclays 1-10 Year Municipal Bond Index 0.98% 4.23% 4.23% 3.82% 2.96% 3.26% 3.78%
BBH Core Fixed Income Composite (gross of fees) 2.93% 11.97% 11.97% 7.98% 7.44% 5.84% 6.96%
BBH Core Fixed Income Composite (net of fees) 2.86% 11.70% 11.70% 7.71% 7.17% 5.58% 6.69%
Bloomberg Barclays US Aggregate Bond Index 0.67% 7.51% 7.51% 5.34% 4.44% 3.84% 6.41%
BBH Inflation-Indexed Fixed Income Composite (gross of fees) 1.33% 10.73% 10.73% 5.86% 5.12% 4.02% 5.89%
BBH Inflation-Indexed Fixed Income Composite (net of fees) 1.29% 10.57% 10.57% 5.70% 4.96% 3.86% 5.73%
Bloomberg Barclays US TIPS Index 1.62% 10.99% 10.99% 5.92% 5.08%

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 BBH Limited Duration Fixed Income Composite is composed of all fully discretionary, fee-paying accounts over $10 million that are managed in the Limited Duration strategy. Under normal market conditions, the target duration may range from approximately 1 to 3 years. May invest in a broad range of taxable fixed income securities, including futures.

The BBH Unconstrained Credit - Fixed Income Composite is composed of all fully discretionary, fee-paying accounts over $10 million that are managed using the Unconstrained Credit - Fixed Income strategy. Under normal market conditions, the target duration is approximately 2 to 6 years. Invests in a broad range of taxable fixed income sectors. Holdings may include investment grade and non-investment grade securities. Futures, options, derivatives, and non-dollar fixed income may be held. Futures, options, and derivatives may be used on a regular basis for risk management and portfolio adjustment. These instruments may be considered leveraged when exposure to the underlying asset is gained with little or no initial cash outlay.

The BBH Structure Fixed Income Composite is composed of all fully discretionary, fee-paying accounts over $10 million that are managed in 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 BBH Intermediate Duration Fixed Income Composite is composed of all fully discretionary, fee-paying fixed income accounts over $5 million that are invested in governments and corporates, with a duration of approximately 3 years.

The BBH Municipal Fixed Income Composite is composed of all fully discretionary fee paying municipal fixed income accounts over $5 million that are managed to an average duration of approximately 4.5 years.

The BBH Core Fixed Income Composite is comprised of 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. Historically to December 31, 2000 the account minimum was $5 million.

The BBH Inflation-Indexed Fixed Income Composite is composed of all 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.

1 Our valuation framework is a purely quantitative screen for bonds that may offer excess return potential, primarily from mean-reversion in spreads. When the potential excess return is above a specific hurdle rate, we label them “Buys” (others are “Holds” or “Sells”). These ratings are category names, not recommendations, as the valuation framework includes no credit research, a vital second step.
2 In our framework, a bond is a ‘Sell’ if Gross MR is negative, and a “hold” or “Buy” when it is positive, and the Gross MR measurement is an estimate of excess return (spread plus additional modeled costs and return potential). If you are interested in learning more about our valuation model, please get in touch with us.
3 For data and explanation of these relationships see “Credit Notes: Four questions on the interplay between the Dollar and cross-border flows into credit markets”, Goldman Sachs Credit Strategy Research (Karoui, Lynam), July 29, 2020.
4 Obligations such as bonds, notes, loans, leases, and other forms of indebtedness, except for cash and cash equivalents, issued by obligors other than the U.S. Government and its agencies, totaled at the level of the ultimate obligor or guarantor of the Obligation.


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

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. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. 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-08942-2021-01-19    Exp. Date  04/30/2021

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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

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