Zephyr Financial Solutions

Rising Treasury Yields Halt the Strong Equity Performance

After a strong first six months of 2023, rising Treasury yields put a halt to the strong performance as U.S. equities (S&P 500 index -3.27%) turned negative during the third quarter. Investor confidence increased heading into the quarter on hopes a recession was unlikely this year and aggressive rate cuts would commence in 2024. However, the optimism over aggressive rate cuts cooled and the Federal Reserve’s (Fed) “high for longer” rhetoric started resonating across markets.

The Fed continued its rate hiking cycle in July and the higher interest rates negatively impacted fixed income as the Bloomberg U.S. Aggregate index fell a -3.23% during the quarter.

Higher Treasury yields and diminishing optimism the Fed will be able to orchestrate a soft landing for the economy weighed on U.S. equities. Despite concerns about the health of the economy, the U.S. labor market remained very strong, and inflation continued to trend downward. After carrying the flag for equity markets during much of 2023, sluggish performance from the famed “Magnificent Seven” (Apple, Microsoft, Alphabet, Amazon, Tesla, Nvidia and Meta) weighed on the overall market. Energy stocks benefited from higher oil prices to post the only positive return for the major U.S. equity sectors and outperformed the others by a wide margin. Below are some of the strategies that make up the PSN Top Guns Large Value Universe.

  • Miller/Howard Investments, Inc.: Midstream Energy (No K-1s) (+3.5% for the quarter)
  • Boston Partners: BP Concentrated Large Cap Value Eq (+1.9% for the quarter)
  • Torray Investment Partners, LLC: Torray Equity Income (+1.8% for the quarter)

Despite falling, U.S. equities (S&P 500 index -3.27%) outpaced developed foreign equities (MSCI EAFE index -4.05%) during the quarter in large part due to the strong U.S. dollar and concerns over the impact higher interest rates will have on economic growth. The European Central Bank raised interest rates twice during the quarter. Concerns the Fed will keep interest rates “higher for longer” on the strength of the U.S economy along with weakness in the Chinese economy hurt emerging markets. Despite the concerns, emerging market equities (MSCI Emerging Markets index -2.79%) outperformed U.S. and developed foreign market equities. The following strategies made the PSN Top Guns list for the Emerging Markets Universe.

  • Newton Investment Management Group: Newton Emerging Markets Small Cap Eq (+7.7% for the quarter)
  • Schroders: Frontier Markets Equity (+6.9% for the quarter)
  • PanAgora Asset Management, Inc.: Stock Selector EM Small Cap (+5.7% for the quarter)

The Fed raised interest rates in July by 0.25% in what might have been the last hike of this cycle. However, the Fed continued to stress that interest rates will remain “higher for longer” which put downward pressure on bond prices. The 2-year Treasury yield rose from 4.87% to 5.05%, and the 10-year Treasury yield rose from 3.81% to 4.57%. Concerns over rising U.S. Government debt levels also weighed on Treasuries. Fitch Ratings downgraded the U.S.’s AAA rating to AA+ due to the increasing debt burden and an “erosion of governance.” Long-term Treasuries, measured by the Bloomberg U.S. Treasury: Long index, plummeted by a -11.83%, while corporate bonds (Bloomberg U.S. Corporate Investment Grade index) fell a -3.09%. Meanwhile, high yield bonds (ICE BofA US High Yield index +0.53) received a boost as investors focused on credit spreads and default risk. Below are some of the strategies that make up the PSN Top Guns Core Plus Universe.

  • Newport Investment Advisors, Inc.: Flexible Bond (+1.9% for the quarter)
  • Neuberger Berman: Multi-Sec Credit (+1.7% for the quarter)
  • Advisors Asset Management: Core Plus Portfolio (+1.7% for the quarter)

The complete list of PSN Top Guns and an overview of the methodology, can be found here. If you do not have a login, you may register for complimentary access. If you would like to learn more about becoming a part of the PSN database or would like to subscribe to PSN data, visit PSN


PSN Top Guns quarterly commentary is presented by Zephyr's Market Strategist Ryan Nauman whose analysis and research has been shared on financial industry media including WealthManagement.com, Reuters, CNBC, Bloomberg, MarketWatch.com, Yahoo! Finance, and the Wall Street Journal, while being a regular guest on TD Ameritrade Network, Yahoo! Finance, Bloomberg TV, Bloomberg Radio and Chuck Jaffe’s Money Life podcast.