February data painted a picture of an economy that remains resilient but increasingly nuanced. The January employment report surprised to the upside, with nonfarm payrolls rising 130K and the unemployment rate edging down to 4.3%, even as participation moved higher. Industry gains broadened beyond healthcare to include construction and professional services, and manufacturing returned to modest growth. However, sizable downward benchmark revisions to prior payroll estimates temper the strength of the headline figure and suggest job growth over the past year was slower than previously reported. Meanwhile, jobless claims moved higher late in the month and announced job cuts reached their highest January level since 2009, pointing to emerging pockets of softness.
Inflation signals were mixed. CPI for January was generally constructive, with headline prices rising 0.2% and the year-over-year rate falling to 2.4%. Core CPI increased 0.3%, bringing the annual pace down to 2.5%. However, the details were less benign, as a sharp decline in used vehicle prices masked firmer underlying components. Meanwhile, December PCE data showed both headline and core rising 0.4%, pushing core PCE inflation back up to 3.0% year-over-year. The GDP report reinforced that dynamic: while real growth for the fourth quarter came in at a softer-than-expected 1.4%, price pressures were stronger, with the GDP price index rising 3.6% annualized. Nominal growth remained solid, but inflation continued to erode real gains.
Minutes from the Federal Reserve’s January meeting reflected this tension. While some participants remain open to additional easing if inflation moderates, several policymakers emphasized that rate hikes could be appropriate should inflation remain above target. The Committee appears inclined to remain on hold for now, balancing firmer labor data against inflation that has yet to convincingly return to 2%.
Markets adjusted accordingly. The Treasury curve bull flattened during February, with longer-term yields declining more than the front end. Credit conditions softened, as investment grade and high yield spreads widened, and agency MBS spreads moved slightly wider as well.
Within Short Term Bond Fund, we maintained a disciplined posture. The flatter curve and somewhat wider spreads reinforced our emphasis on high-quality holdings and liquidity. Agency mortgage exposure was maintained but monitored closely as spreads cheapened. Duration remains aligned with peers, emphasizing income generation and capital preservation amid a policy backdrop that has become more two-sided and data dependent.
Economic developments in February underscored the complexity of the current cycle. The labor market delivered a stronger-than-anticipated payroll gain of 130K in January, with unemployment dipping to 4.3% alongside a rise in participation. Sector breadth improved modestly, including gains in construction and business services, while manufacturing activity moved back into expansion according to ISM data. At the same time, downward benchmark revisions to prior payroll data and an uptick in jobless claims indicate that the underlying pace of job creation over the past year was more moderate than previously estimated.
Growth data were softer at first glance. Fourth-quarter real GDP increased at a 1.4% annualized rate, below expectations, largely reflecting a decline in government spending and softer residential investment. Yet underlying private domestic demand held steady, and nominal GDP growth remained firm. Inflation was the more persistent story. While CPI moderated modestly in January, core PCE inflation re-accelerated to 3.0% year-over-year in December, and the GDP price index rose at a 3.6% annualized pace. Consumer spending remained positive in real terms but was supported by a lower savings rate, as tax payments and elevated prices weighed on disposable income.
The Federal Reserve’s January meeting minutes highlighted a Committee that sees risks on both sides. Some officials would favor further cuts if inflation trends lower, but several indicated that additional tightening could be warranted should price pressures fail to ease. For now, policymakers appear comfortable maintaining the current target range while assessing incoming data.
February’s market tone reflected moderating growth expectations and firmer inflation concerns. The Treasury curve bull flattened as longer yields declined. Credit spreads widened across both investment grade and high yield markets, and agency MBS spreads moved somewhat wider after several months of tightening.
In Multi-Sector Bond Fund, positioning reflects a balanced approach to these crosscurrents. High yield exposure remains focused on shorter-duration, higher-quality issuers, where carry remains compelling relative to risk. Agency mortgage allocations were maintained, recognizing improved valuations. Portfolio liquidity remains strong, and duration is kept within category ranges as we navigate a backdrop defined by resilient growth, firmer inflation, and a Federal Reserve that has reintroduced two-sided policy risk.
Past Performance is no guarantee of future results.
The performance data quoted represents past performance. Current performance may be lower or higher than the performance data quoted above. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. For performance information current to the most recent month-end, please call toll-free 800-544-6060
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.