The fragile ceasefire with Iran collapsed early in July as U.S. strikes resumed, sending oil prices surging roughly 20% over the month and reversing much of the relief that had followed June's diplomatic progress. Sporadic attempts at de-escalation through the month, including a brief pause in hostilities around mid-July, failed to hold, and an Iranian strike on a U.S. target near month end underscored the conflict's continued intensity. The Strait of Hormuz remains a source of significant supply uncertainty.
The June CPI report provided a piece of encouraging news on inflation. Core prices were essentially flat in the month and the headline declined 0.4%, bringing the twelve-month rates down to 2.6% and 3.5%, respectively. The improvement was broad-based, with declines in insurance, apparel, and medical services, and the three-month annualized core rate slowed to 2.3%. Producer prices also surprised to the downside, with headline PPI falling 0.3% as energy costs reversed and core increasing only 0.1%. However, the relief should be kept in perspective: year-over-year headline PPI remains above 5%, and the estimated core PCE reading for June still came in around 0.2%, corresponding to a twelve-month rate above 3.3%. One month does not constitute a trend, particularly with oil prices climbing again.
The Federal Reserve held the fed funds rate steady at 3.50-3.75% at its July meeting, but the 9-3 vote highlighted a Committee that is edging closer to tightening. Presidents Hammack, Kashkari, and Logan all dissented in favor of a 25 basis point hike. The statement was unchanged from June, with no forward guidance and the same commitment to deliver price stability. Chair Warsh described the decision as "the farthest thing away from inertia" and characterized the Committee's posture as one of "watchful thinking, not watchful waiting." He acknowledged that if inflation remains elevated through the forecast horizon, higher rates could be part of the response, but offered no signals on timing. The labor market was mixed, with June nonfarm payrolls rising only 57,000, below expectations and accompanied by significant downward revisions to prior months, though the unemployment rate ticked down to 4.2% as the labor force contracted sharply.
Treasuries sold off in a pronounced bear steepener, with the long end of the curve leading the move as renewed conflict pushed oil higher and reignited inflation concerns. Short-term yields rose modestly while 10-year and 30-year yields climbed roughly 25 to 30 basis points. The 2s10s slope steepened meaningfully. Investment grade spreads and agency MBS both widened.
In Short Term Bond Fund, we maintained high-quality positions throughout the month and trimmed agency debt and mortgage exposure modestly as bond durations extended into the selloff. Weighted average duration remains aligned with the peer group and liquidity is robust. With three FOMC members now voting for higher rates and oil once again climbing, the balance of risks continues to lean toward tighter policy. The favorable CPI print was welcome but does not change the broader inflation picture, which remains above the Fed's target and is now facing renewed energy headwinds.
The U.S.-Iran ceasefire unraveled in early July, with strikes resuming and oil prices climbing approximately 20% over the month. Diplomatic efforts sputtered throughout the period, and an Iranian attack on a U.S. target late in July reinforced the view that the conflict is far from resolved. The Strait of Hormuz remains contested, and energy supply risk has once again become a central concern for markets. The sharp reversal in oil erased the gains that had accompanied June's memorandum of understanding.
June's inflation data offered a welcome reprieve, though one that proved fleeting. The CPI report was much better than expected, with core prices essentially unchanged in the month and the headline falling 0.4%, pulling the annual rates down to 2.6% and 3.5%. Weakness was widespread across categories, and the three-month core rate decelerated to 2.3%. The PPI report reinforced the picture, with headline prices declining 0.3% on falling energy costs and core rising a subdued 0.1%. Estimated core PCE for June came in near 0.2% for the month, leaving the twelve-month pace around 3.3%. While these readings represent a meaningful improvement from the spring, year-over-year producer prices remain above 5% and the renewed surge in oil threatens to push headline inflation higher again in the months ahead.
At its July meeting, the FOMC held rates at 3.50-3.75% in a 9-3 decision, with Presidents Hammack, Kashkari, and Logan dissenting in favor of a quarter-point increase. The statement was identical to June, containing no forward guidance and reiterating the Committee's commitment to price stability. Chair Warsh pushed back against the characterization of the hold as a pause, describing it instead as a period of active deliberation on fundamental questions about the inflation process, the nature of supply shocks, and the tools available. He noted that the number of participants who view a hike as equally probable as a cut has continued to grow. On the labor market, June payrolls came in below expectations at 57,000 with sizable downward revisions, though the unemployment rate fell to 4.2% as the labor force contracted by an unusually large margin. The household and establishment surveys continue to diverge.
The rate market experienced a sharp bear steepener, with the long end bearing the brunt of the selloff. Yields on 10-year and 30-year Treasuries rose roughly 25 to 30 basis points as the resurgence in oil prices reignited fears of persistent inflation, while the front end moved up more modestly. The 2s10s slope steepened about 15 basis points. Investment grade and higher-quality high yield spreads moved wider, while energy-related high yield outperformed. Agency MBS spreads widened.
In Yorktown Bond Fund, positioning reflects the renewed uncertainty. High yield allocations remain concentrated in shorter-duration, higher-quality names, and we have been cautious about adding to lower-quality credits, even reducing our total exposure in July. We added selectively to investment grade corporates. Portfolio liquidity is strong and duration sits below the category average, serving us well in the July rate move. The June inflation data raised hopes that the worst of the price pressures may be passing, but with oil climbing again, three Fed officials now voting for hikes, and Chair Warsh making clear that tightening remains on the table, the path ahead for fixed income remains challenging.
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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.