March was dominated by a sharp escalation in geopolitical risk after military strikes on Iran sent oil prices surging and injected deep uncertainty into an already complicated macro environment. WTI crude climbed roughly 50% over the course of the month as threats to transit through the Strait of Hormuz raised the specter of a sustained energy supply disruption. Risk assets sold off broadly and rate volatility as measured by the MOVE index surged.
Labor market conditions deteriorated meaningfully. February nonfarm payrolls contracted by 92,000, the first outright decline in some time, with net downward revisions of 69,000 to prior months. Private employment fell by 86,000. The unemployment rate ticked up to 4.4% while participation dropped sharply to 62.0% from 62.5%, though new population controls likely contributed to that decline. Wage growth firmed modestly to 3.8% year-over-year. Job openings data for January were a relative bright spot, with vacancies rising to 6.95 million, pushing the vacancy-to-unemployment ratio back up to 0.92. Services activity surprised to the upside, with the ISM services index jumping to 56.1 from 53.8, led by a surge in new orders.
Inflation data continued to run uncomfortably warm. The February CPI report showed headline prices rising 0.3% on the month, holding the twelve-month rate at 2.4%, while core advanced 0.2%, leaving the annual pace at 2.5%. However, much of the softness in core again reflected declining used vehicle prices, and core services excluding rents climbed at a 4.8% annualized pace over the prior three months. The February PPI was considerably hotter than anticipated, with headline prices up 0.7% and core advancing 0.5%, lifting the year-over-year headline rate to 3.4%. January core PCE rose 0.4%, bringing the twelve-month rate to 3.1%. Fourth-quarter GDP was revised down to a 0.7% annualized pace from 1.4%, but the GDP price index was revised higher to 3.8%, reinforcing the theme of slowing real activity alongside persistent price pressures.
The Federal Reserve held the fed funds rate steady at 3.50-3.75% at its March meeting in an 11-1 decision, with Governor Miran the lone dissenter favoring a 25 basis point cut. The updated Summary of Economic Projections maintained the median path of one rate reduction each in 2026 and 2027, but raised the core PCE forecast for this year to 2.7% from 2.5% and nudged up the GDP growth estimate to 2.4%. The longer-run neutral rate edged higher to 3.125%, and the estimate of potential growth was lifted to 2.0% from 1.8%. Chair Powell acknowledged the Committee had discussed the possibility of rate increases and noted that the cumulative impact of pandemic disruptions, tariff uncertainty, and the oil shock could weigh on inflation expectations. Seven participants now project no cuts at all this year.
Treasury yields rose sharply across the curve. The front end sold off roughly 42 basis points while the 10-year moved up 38 basis points, resulting in a modest flattening of the 2s10s slope. Longer-dated yields also moved meaningfully higher. Credit spreads widened significantly, with investment grade spreads moving out modestly while high yield spreads widened more substantially. Agency MBS spreads also widened.
Within Short Term Bond Fund, we maintained a cautious and liquid posture throughout the month. The sharp repricing in rates and credit reinforced our emphasis on high-quality, shorter-duration holdings and agency mortgage exposure. Portfolio duration remains in line with the peer group. Our focus continues to center on income generation and capital preservation in an environment where geopolitical risk, energy-driven inflation uncertainty, and a Federal Reserve that has become more explicitly two-sided all argue for patience and flexibility.
Geopolitical upheaval defined March, as military strikes on Iran triggered a dramatic repricing of energy and risk assets. Oil prices spiked roughly 50% over the period, with WTI moving past $100 per barrel amid fears of a broader regional conflict and potential disruption to shipping through the Strait of Hormuz. Risk appetite deteriorated quickly, and the MOVE index of rate volatility surged as markets grappled with the implications of a sustained energy supply shock.
The employment picture weakened notably. Nonfarm payrolls fell by 92,000 in February, a marked reversal from the previous month's strength, accompanied by net downward revisions of 69,000 across the prior two reports. Private sector employment declined by 86,000. Unemployment edged higher to 4.4%, and the participation rate dropped to 62.0%, though new population controls likely amplified the move. Average hourly earnings picked up slightly to 3.8% on an annual basis. On a more constructive note, job openings in January climbed to 6.95 million and the ratio of openings to unemployed workers improved to 0.92 from 0.89. Meanwhile, ISM services activity jumped to 56.1, with new orders strengthening considerably, suggesting underlying demand in the service economy remains intact.
Growth data sent mixed signals. Fourth-quarter real GDP was revised down to just 0.7% annualized from an initial estimate of 1.4%, driven largely by weaker consumer spending on services and softer business investment. Core capital goods orders were flat in January and shipments edged lower, painting a somewhat disappointing picture for capex despite surging capital goods imports. Manufacturing output rose 0.2% in February with notable upward revisions to January, and business equipment production remained firm. Real consumer spending in January advanced only 0.1%, supported by a continued drawdown in savings.
Inflation pressures intensified ahead of the anticipated energy shock. February headline CPI increased 0.3%, keeping the annual rate at 2.4%, with core up 0.2% and the twelve-month pace holding at 2.5%. Used vehicle prices once again masked underlying firmness: core goods excluding used cars rose 0.2%, and core services less rents accelerated to a 4.8% three-month annualized rate. Producer prices were significantly stronger than expected, with headline PPI up 0.7% and core up 0.5%, pushing the annual headline figure to 3.4%. January core PCE advanced 0.4%, lifting the year-over-year rate to 3.1%, while the fourth-quarter GDP price index was revised up to 3.8% annualized. This constellation of data underscores that underlying price pressures have yet to abate even before March's energy surge flows through.
At its March meeting, the FOMC voted 11-1 to keep the federal funds rate at 3.50-3.75%, with Governor Miran dissenting in favor of a quarter-point reduction. The median dot plot continued to project one cut in 2026 and one in 2027, but seven members now see no easing this year. Updated projections raised the median core PCE forecast to 2.7% for 2026, lifted real GDP growth estimates across the forecast horizon, and bumped the longer-run neutral rate to 3.125% from 3.0%. The longer-run growth estimate was also raised to 2.0%, reflecting ongoing productivity gains. In his press conference, Chair Powell flagged the compounding uncertainty from pandemic aftereffects, tariff disruptions, and an oil shock of uncertain duration, and noted that the Committee had discussed the potential need for tighter policy should inflation prove more stubborn.
Fixed income markets repriced aggressively. Yields backed up across the maturity spectrum, with moves of 40+ basis points through the intermediate part of the curve and somewhat smaller increases at the long end, producing a flatter term structure. Spread sectors came under broad pressure as well. In credit, the widening was concentrated in high yield, where CCC-rated names saw spreads gap out by roughly a full percentage point, while investment grade names experienced more contained deterioration. The agency MBS basis also gave back much of the tightening that had accumulated in December and January.
In Multi-Sector Bond Fund, positioning reflects the heightened uncertainty. High yield allocations remain concentrated in shorter-duration, higher-quality names where the additional carry continues to offer an attractive risk-reward tradeoff, though we have been selective in adding exposure given the magnitude of spread widening. Agency mortgage holdings were maintained, with wider spreads presenting improved relative value. Portfolio liquidity was bolstered during the month. Duration is managed within category norms as we navigate an environment characterized by a weakening labor market, sticky inflation that is poised to accelerate on energy costs, and a Federal Reserve that has signaled it is prepared to move in either direction depending on how these forces resolve.
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Sources: Yorktown Management & Research Co., Bloomberg.
All estimates use daily fund pricing and Yorktown's standard credit quality evaluation method.
Definition of Terms
United States Treasury (UST) - the national treasury of the federal government of the United States where it serves as an executive department. The Treasury manages all of the money coming into the government and paid out by it.
Asset-Backed Security (ABS) - An asset-backed security is an investment security --a bond or note --which is collateralized by a pool of assets, such as loans, leases, credit card debt, royalties, or receivables.
Basis Points (bps) - refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.
High Yield (HY) - high-yield bonds (also called junk bonds) are bonds that pay higher interest rates because they have lower cre dit ratings than investment-grade bonds. High-yield bonds are more likely to default, so they must pay a higher yield than investbonds to compensate investors.
Investment Grade (IG) - an investment grade is a rating that signifies that a municipal or corporate bond presents a relatively low risk of default.
The funds are distributed by Ulitmus Distributors, LLC. There is no affiliation between Ultimus Fund Distributors, LLC and the other firms referenced in this material.
Gross Domestic Product (GDP) - The total value of goods produced and services provided in a country during one year.
Personal Consumption Expenditures (PCE) - the primary measure of consumer spending on goods and services in the U.S. economy.
Mortgage-backed securities (MBS): Debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property.
The fund itself has not been rated by an independent rating agency. Ratings (other than U.S. Treasury securities or securities issued or backed by U.S. agencies) provided by Nationally Recognized Statistical Rating Organizations (NRSRO's) including Standard & Poor's, Moody's, Fitch, Kroll, Morningstar DBRS, A.M. Best, and Egan-Jones. This breakdown is not an S&P credit rating or an opinion of S&P as to the creditworthiness of such portfolio. This breakdown is provided by Yorktown Management & Research. When calculating the credit quality breakdown, the manager selects the middle rating when three or more rating agencies rate a security. When two agencies rate a security, the higher of the two ratings is used, and one rating is used if that is all that is provided. A rating of BB and below would represent below investment-grade. Ratings apply to the credit worthiness of the issuers of the underlying securities and not the fund or its shares.
Ratings may be subject to change.
Investing involves risk, including loss of principal. There is no guarantee that this, or any, investment strategy will succeed. Fixed income investments are affected by a number of risks, including fluctuation in interest rates, credit risk, and prepayment risk. In general, as prevailing interest rates rise, fixed income securities prices will fall. Diversification does not ensure a profit or guarantee against loss.
1 Includes Structured Notes, Preferred, and Corporate Bonds not rated by a Nationally Recognized Statistical Rating Organizatio n (NRSRO).
2 Duration measures the sensitivity of the price (the value of principal) of a fixed -income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. Spread duration is the sensitivity of the price of a security to changes in its credit spread. The credit spread is the difference between the yield of a security and the yield of a benchmark rate, such as a cash interest rate or government bond yield.
3 Rating Sensitive, Component, and Step-Up Bonds.
4 Weightings subject to change.