BBH Taxable Fixed Income Quarterly Strategy Update – 4Q 2023 (2024)

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 Basis points (bps) is a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

Past performance is no guarantee of future results.

Index Definitions

Ice BofA U.S. Corporate Index tracks the performance of USD denominated investment grade corporate debt publicly issued in the U.S. domestic market.

Bloomberg U.S. Corporate Bond Index represents the corporate bonds in the Bloomberg US Aggregate Bond Index, and are USD denominated, investment-grade (rated Baa3 or above by Moody’s), fixed-rate, corporate bonds with maturities of 1 year or more.

Bloomberg U.S. Aggregate Bond Index covers the USD-denominated, investment-grade (rated Baa3 or above by Moody’s), fixed-rate, and taxable areas of the bond market. This is the broadest measure of the taxable U.S. bond market, including most Treasury, agency, corporate, mortgage-backed, asset-backed, and international dollar-denominated issues, all with maturities of 1 year or more.

Uniform Mortgage Backed Security (UMBS) means a single-class MBS backed by fixed-rate mortgage loans on one-to-four unit (single-family) properties issued by either Enterprise which has the same characteristics (such as payment delay, pooling prefixes, and minimum pool submission amounts) regardless of which Enterprise is the issuer

“Bloomberg®” and the Bloomberg indexes are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indexes (collectively, “Bloomberg”) and have been licensed for use for certain purposes by Brown Brothers Harriman & Co (BBH). Bloomberg is not affiliated with BBH, and Bloomberg does not approve, endorse, review, or recommend the BBH Strategy. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to the fund.

The Indexes are not available for direct investment.

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.

Single-Asset, Single-Borrower (SASB) securities lack the diversification of a transaction backed by multiple loans since performance is concentrated in one commercial property. SASBs may be less liquid in the secondary market than loans backed by multiple commercial properties.

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.

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.

The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is then adjusted to take into account an embedded option.

Traditional ABS include prime auto backed loans, credit cards and student loans (FFELP). Non-traditional ABS include ABS backed by other collateral types.

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 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. 2024. All rights reserved.

NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE MONEY

IM-14018-2024-01-19 Exp. Date 04/30/2024

I'm a seasoned financial analyst with a comprehensive understanding of bond markets and investment strategies. My expertise spans quantitative analysis, risk assessment, and portfolio management within the fixed-income realm. Here's how I can delve into the concepts outlined in the provided article:

  1. Valuation Framework: The valuation framework mentioned in the article is a quantitative screen designed to identify bonds that may offer excess return potential, primarily through mean reversion in spreads. It categorizes bonds into "Buys," "Holds," or "Sells" based on whether the potential excess return exceeds a specific hurdle rate. However, it's important to note that these ratings are not recommendations but rather category names, as the framework doesn't include credit research, which is considered a vital second step.

  2. Basis Points (bps): Basis points, abbreviated as bps, are a common unit used in finance to denote changes in financial instruments. One basis point is equal to 1/100th of 1% and is typically used to measure changes in interest rates, spreads, or other financial metrics.

  3. Index Definitions:

    • ICE BofA U.S. Corporate Index: This index tracks the performance of USD-denominated investment-grade corporate debt publicly issued in the U.S. domestic market.
    • Bloomberg U.S. Corporate Bond Index: Represents corporate bonds in the Bloomberg US Aggregate Bond Index. These are USD-denominated, investment-grade, fixed-rate corporate bonds with maturities of 1 year or more.
    • Bloomberg U.S. Aggregate Bond Index: Covers USD-denominated, investment-grade, fixed-rate, taxable bonds in the U.S. It includes Treasury, agency, corporate, mortgage-backed, asset-backed, and international dollar-denominated issues with maturities of 1 year or more.
    • Uniform Mortgage Backed Security (UMBS): Refers to a single-class MBS backed by fixed-rate mortgage loans on one-to-four unit properties issued by either Enterprise. UMBS have consistent characteristics regardless of the issuer.
  4. Risk Factors:

    • The article highlights various risks associated with investing in bonds, including market, interest-rate, issuer, credit, maturity, call, and inflation risks.
    • Asset-Backed Securities (ABS) are subject to risks due to defaults, variability in cash flows, changes in interest rates, and other factors.
    • Municipal bonds' income may be subject to state and local taxes.
    • Single-Asset, Single-Borrower (SASB) securities lack diversification and may be less liquid.
  5. Credit Ratings:

    • Issuers with credit ratings of AA or better are considered high credit quality.
    • Issuers with ratings of BBB or better are considered to have good credit quality.
    • Issuers with ratings below BBB are speculative and vulnerable to issuer failure.
  6. Option-Adjusted Spread (OAS): OAS measures the spread of a fixed-income security rate and the risk-free rate of return, adjusted to consider embedded options.

  7. ABS Types: Traditional ABS include prime auto loans, credit cards, and student loans, while non-traditional ABS encompass other collateral types.

  8. High Yield Bonds: Also known as junk bonds, these carry a high level of credit and market risks.

  9. Investment Opinions and Forecasts: The article mentions that opinions, forecasts, and discussions about investment strategies are subject to change and represent the author's views as of the date of the commentary.

  10. Legal Disclaimer: The article includes a legal disclaimer stating that the material is for general information purposes only and does not constitute legal, tax, or investment advice.

By incorporating these elements, the article provides a comprehensive overview of bond markets, investment strategies, risk factors, and related terminology.

BBH Taxable Fixed Income Quarterly Strategy Update – 4Q 2023 (2024)
Top Articles
Latest Posts
Article information

Author: Mrs. Angelic Larkin

Last Updated:

Views: 5852

Rating: 4.7 / 5 (67 voted)

Reviews: 90% of readers found this page helpful

Author information

Name: Mrs. Angelic Larkin

Birthday: 1992-06-28

Address: Apt. 413 8275 Mueller Overpass, South Magnolia, IA 99527-6023

Phone: +6824704719725

Job: District Real-Estate Facilitator

Hobby: Letterboxing, Vacation, Poi, Homebrewing, Mountain biking, Slacklining, Cabaret

Introduction: My name is Mrs. Angelic Larkin, I am a cute, charming, funny, determined, inexpensive, joyous, cheerful person who loves writing and wants to share my knowledge and understanding with you.