Short Term Bond Fund
The Iran conflict remained the dominant macro theme in May, though the trajectory shifted meaningfully toward de-escalation by month end. Oil prices declined roughly 15% during the period as ceasefire conditions mostly held and diplomatic momentum gathered pace. Late in the month, U.S. and Iranian negotiators reached a tentative agreement on a 60-day memorandum of understanding that would extend the ceasefire, commit to unrestricted shipping through the Strait of Hormuz, and launch negotiations over Iran's nuclear program. President Trump had not yet given his final approval as the month drew to a close. While the prospect of a deal is the most significant diplomatic development since the conflict began, energy markets remain sensitive to the risk that negotiations could still unravel.
May also marked a historic transition at the Federal Reserve. The Senate confirmed Kevin Warsh as the next Fed Chair on May 13th in a 54-45 vote. Warsh was sworn in on May 22nd, inheriting an institution more divided than at any point in recent memory and an inflation backdrop that has proved more persistent than policymakers anticipated. Jerome Powell, who indicated at his final press conference in April that he would remain as a Governor in a diminished role, stepped aside quietly. Governor Miran vacated his seat to make room for Warsh. There was no FOMC meeting in May, but Warsh's first meeting as Chair will be closely watched for any shift in communication or policy stance.
Inflation data throughout May were challenging. The April CPI report showed core prices rising 0.4%, above expectations, pushing the twelve-month core rate up to 2.8%. Headline CPI increased 0.6%, lifting the annual pace to 3.8%, driven in part by further energy price increases and above-trend food costs. The super core measure of services excluding energy and rents ran at a 4.0% annualized pace over the prior three months. The producer price report was worse. April headline PPI surged 1.4%, propelling the twelve-month rate to 6.0% from 4.0%, while core PPI rose 0.6%, lifting the annual rate to 4.4%. March PPI figures were also revised higher. The April PCE data, released on the final day of May, showed headline prices up 0.4% and core up 0.2% in the month, slightly softer than feared, but the year-over-year rates climbed to 3.8% and 3.3% respectively. The three-month annualized figures told the real story: headline PCE running at 6.0%, core at 3.8%, and core services excluding housing at a rate that should be uncomfortable for anyone at the Fed. Market-based inflation expectations reflected the deterioration, with 10-year breakevens reaching their highest level since 2023.
The labor market presented a paradox. Nonfarm payrolls in April rose 115,000, the strongest gain since 2024, and March was revised up to 185,000. Job creation was broad-based, with contributions from healthcare, transportation, and retail trade, and the private workweek lengthened. The unemployment rate held at 4.3%. However, the household survey continued to diverge sharply from the establishment data, showing job losses in all four months of 2026. Labor force participation slipped further to 61.8%. Wage growth remained contained at 0.2% month-over-month, offering little support to the argument that labor costs are driving inflation higher. First-quarter GDP was revised down to 1.6% annualized from 2.0%, mostly due to a larger inventory drawdown, while the underlying measure of private domestic final purchases held at a solid 2.4% pace. Nominal GDP growth of 5.6% in the quarter underscores that there is ample demand in the economy to sustain price pressures.
The Treasury market sold off in a bear-flattening pattern, with the front end of the curve leading the move higher. Short and intermediate yields rose roughly 12 basis points while the long end was little changed. Mid-month, the 30-year yield briefly topped levels not seen since before the financial crisis as the accumulation of hotter inflation data weighed on sentiment across global bond markets. Credit spreads, by contrast, tightened as the improving geopolitical outlook supported risk appetite. Investment grade and high yield spreads both narrowed modestly, though CCC-rated credits bucked the trend and widened, suggesting ongoing discrimination in lower-quality markets. Agency MBS spreads tightened slightly.
Within Short Term Bond Fund, we maintained a defensive posture appropriate to the current environment. The combination of accelerating inflation, a bear-flattening yield curve, and an approaching leadership change at the Federal Reserve all argue for caution. High-quality, shorter-duration holdings remain the core of the portfolio. We added selectively to the investment grade corporate exposure during the month, while agency mortgage positions were held steady with spreads modestly tighter. Duration remains a touch higher than the peer group, but well within the usual category range. Liquidity is robust. The tentative Iran agreement, if finalized, could ease some of the energy-driven inflation pressure in coming months, but the breadth of price increases across core measures suggests the inflation problem extends beyond oil.
Bond Fund
Diplomacy took center stage in May as the Iran conflict moved closer to a potential resolution. Oil prices fell approximately 15% over the month as the ceasefire mostly held and negotiations advanced. In the final days of May, U.S. and Iranian negotiators announced a tentative 60-day memorandum of understanding that would extend the ceasefire, restore unrestricted commercial transit through the Strait of Hormuz, include an Iranian commitment not to pursue nuclear weapons, and open formal talks on enrichment and sanctions relief. The agreement awaits President Trump's final sign-off. The development represents the most meaningful diplomatic progress since hostilities began, but the path from a framework to a durable settlement remains uncertain and energy markets continue to reflect that ambiguity.
The month also brought a generational shift in Federal Reserve leadership. Kevin Warsh was confirmed by the Senate on May 13th and took the oath of office on May 22nd. He assumes the chair at a particularly challenging juncture: inflation is running well above target on every meaningful gauge, the Committee is more fractured than it has been in decades, and the credibility of forward guidance is being tested by rapidly shifting economic conditions. Jerome Powell will remain on the Board of Governors in a low-profile capacity. Governor Miran stepped down to create a vacancy for Warsh. Although there was no FOMC meeting in May, market participants are focused on how Warsh will approach communication and consensus-building at his inaugural meeting.
The inflation picture deteriorated further in May's data releases. April core CPI came in above consensus at 0.4%, lifting the annual rate to 2.8%, with an outsized contribution from shelter costs that reflected a catch-up from data gaps during last year's government shutdown. Headline CPI rose 0.6%, bringing the year-over-year rate to 3.8%. Services prices excluding energy and rents, the Fed's preferred super core metric, ran at a 4.0% annualized clip over the preceding three months. The April PPI was worrisome: headline prices jumped 1.4%, the largest monthly increase in some time, catapulting the annual rate to 6.0%. Core PPI rose 0.6% with the twelve-month rate climbing to 4.4%. March figures were revised higher as well. Clear evidence of energy cost pass-through into core categories was visible, with airline fares, final demand services, and intermediate goods prices all accelerating. The PCE report released on May 28th was marginally less alarming on a monthly basis, with core up 0.2% and headline up 0.4%, but the annual rates rose to 3.3% and 3.8% respectively. Three-month annualized measures paint a starker picture: headline PCE at 6.0%, core at 3.8%, and core services excluding housing running at levels that are difficult to reconcile with the view that current policy is sufficiently restrictive. Inflation expectations in financial markets climbed to multi-year highs, with 10-year breakevens reaching levels not seen since 2023 and one-year expectations above 3.25%.
Employment data were firmer on the surface but conflicted underneath. April nonfarm payrolls rose 115,000, the best reading since 2024, with broad participation across sectors including healthcare, retail, and transportation. March payrolls were revised higher to 185,000, while February's loss was deepened to 156,000. The unemployment rate was unchanged at 4.3% as the labor force contracted again and participation fell to 61.8%. Wage growth remained benign at 0.2% for the month. The divergence between the establishment and household employment surveys grew more pronounced, with the household measure showing job declines in every month of 2026, a pattern that historically has signaled turning points. On the growth front, first-quarter real GDP was revised down to 1.6% from 2.0%, primarily because of a deeper inventory drawdown that is likely to reverse and support second-quarter output. The core measure of consumer and business spending held near 2.4%, and nominal GDP growth of 5.6% in the quarter remains robust. Capital goods shipments have accelerated to their fastest pace since early 2022. The ISM services index eased slightly to 53.6 but the prices paid component held at a very elevated 70.7, consistent with ongoing cost pressures in the service economy.
Bond markets reflected the tension between worsening inflation data and improving geopolitical sentiment. Treasuries sold off in a bear-flattening move, with short and intermediate yields climbing roughly 12 basis points and the long end barely higher. The flattening was most pronounced in the 5s30s portion of the curve, which compressed meaningfully. In mid-May, the 30-year yield briefly pierced levels not seen since before the 2008 financial crisis, a moment that concentrated attention on the potential consequences of sustained higher borrowing costs for housing and corporate investment. Spread markets moved in the opposite direction, tightening across most of the quality spectrum as ceasefire optimism and resilient economic activity supported demand for risk assets. Investment grade spreads narrowed modestly, with the compression most visible in BBB-rated names. High yield spreads also tightened, though CCC-rated credits widened, a notable divergence that reflects continued caution toward the lowest-quality borrowers. Agency MBS spreads edged tighter.
In Yorktown Bond Fund, positioning balances the improving geopolitical backdrop against an inflation trajectory that has worsened on nearly every dimension. High yield allocations remain tilted toward shorter-duration, higher-quality issuers where the carry advantage is compelling, and we have been cautious about adding lower-quality exposure given select areas of widening and heavy new issuance driven by AI-related capital spending. Agency mortgage holdings were maintained as spreads continued to recover from the March wides. We selectively added to investment grade corporates during the month. Portfolio liquidity is strong and duration sits near the category average. We have been intentional in keeping a cash buffer as dry powder. The potential Iran agreement, if consummated, would be a meaningful positive for energy prices and by extension the inflation outlook, but the breadth of price acceleration across core measures, producer costs, and inflation expectations suggests that the Fed under new leadership faces difficult choices regardless of how the conflict resolves.
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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.