April 2022 | Fixed Income Markets Recap
Fixed income assets suffered losses in April as investors attempted to navigate the headwinds stemming from the Fed’s hawkish policy measures to combat inflation and the commodity market pressures resulting from the European geopolitical conflict. U.S. aggregate bonds fell -3.79% over the month amid rising yields as the index experienced its worst monthly decline since February 1980. Declines for global aggregate bonds were even more severe as the index returned -5.48% closing the period with the worst monthly performance since its inception in 1990. The turmoil in fixed income markets is expected to continue as investors face the most aggressive Fed tightening cycle on record.
The selloffs in fixed income are largely a function of rising interest rates as markets price in further restrictive policy actions from the Fed. The central bank is widely expected to raise its policy rate by 0.50% following its two-day May meeting, marking the largest rate increase since 2000. Furthermore, the Fed is anticipated to announce its plans for balance sheet runoff as it proceeds with quantitative tightening. The derivatives market, serving as a gauge to future Fed rate increases, is pricing in an additional 50 bps rate hike at the subsequent meeting in June. Looking ahead, investors will closely monitor Fed speak as they aim to garner information around the potential for a 75 bps rate hike in the near term.
As markets witnessed a surge in yields along the Treasury curve during the month, the most notable move occurred in the 10-year Treasury yield to maturity. This benchmark yield quickly approached 3% in late April for the first time since the market rout in 4Q 2018. In fact, the rise of 56 bps over the month was the largest such increase in the 10-year yield since November 2016. When viewing the change in yields on a rolling three-month basis, the 10-year yield has risen 111 bps – marking the largest upward move since April 1994 amid the Fed tightening cycle. As nominal rates increased, yields on the 10-year TIPS – a proxy for real yields – moved into positive territory on the last trading day of the month. These positive levels hadn’t been attained in over two years prior to the pandemic induced rate cuts in 1Q 2020. Fixed income investors closely monitor these TIPS yields as they provide insight into whether borrowing costs are rising or falling on a real basis. Negative real yields have bolstered the TINA narrative among market participants as record inflows were witnessed in equity funds amid 2021. The recent ascent in rates has contributed to the increasing bond market volatility as measured by the MOVE Index. The myriad of unknowns facing markets will further exacerbate rate volatility going forward until investors receive a clearer picture around the direction of the economy.
Index Returns – all shown in US dollars
All returns shown trailing 4/30/2022 for the period indicated. “YTD” refers to the total return as of prior-year end, while the other returns are annualized. 3-month and annualized returns are shown for:
- The Barclay’s US Aggregate Index, a broad-based unmanaged bond index that is generally considered to be representative of the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
- The ICE BofAML Emerging Markets Sovereign Bond Index is a subset of The BofA Merrill Lynch World Sovereign Bond Index excluding all securities with a country of risk that is a member of the FX G10, all Western European countries, and territories of the U.S. and Western European countries. The FX G10 includes all Euro members, the U.S., Japan, the U.K., Canada, Australia, New Zealand, Switzerland, Norway, and Sweden.
- The Bloomberg Barclays Global Aggregate Index, which measures global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.
- The S&P Global Developed Sovereign Bond index includes local-currency denominated debt publicly issued by governments in their domestic markets.
- S&P Eurozone Developed Sovereign Bond – seeks to measure the performance of Eurozone government bonds.
- The S&P Pan-Europe Developed Sovereign Bond Index is a comprehensive, market-value-weighted index designed to track the performance of local currency-denominated securities publicly issued by Denmark, Norway, Sweden, Switzerland, the U.K. and developed countries in the Eurozone for their domestic markets.
- ICE BofAML Emerging Markets Sovereign Bond – tracks the performance of US dollar (USD) and Euro denominated emerging markets non-sovereign debt publicly issued within the major domestic and Eurobond markets.
- The Bloomberg Barclay’s US Corporate Bond Index (AA), which measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
- The Bloomberg Barclay’s US Corporate High Yield Index, which covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
- Bloomberg Barclay’s Global Aggregate Securitized- US Mortgage-Backed Securities, which is a component of the Bloomberg Barclay’s US Aggregate Index and measures investment grade mortgage backed pass-through securities of GNMA, FNMA, and FHLMC.
- Bloomberg Barclay’s Global Aggregate Securitized- US Asset-Backed Securities, which is a component of the Bloomberg Barclay’s US Aggregate Index and includes the pass-throughs, bullets, and controlled amortization structures of only the senior class of ABS issues.
- The Blomberg Barclay’s US Floating Rate Notes (<5 Yr) Index, measures the performance of U.S dollar-dominated, investment grade floating rate notes with maturities less than 5 years.
- The Bloomberg Barclay’s Municipal Bond Index, which measures investment grade, tax-exempt bonds with a maturity of at least one year.
- The S&P/ LSTA Leveraged Loan Index is designed to reflect the performance of the largest facilities in the leveraged loan market.
An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Index performance used throughout is intended to illustrate historical market trends and performance. Indexes are managed and do not incur investment management fees. An investor is unable to invest in an index. Their performance does not reflect the expenses associated with the management of an actual portfolio. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All investing involves risk including loss of principal. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Past performance is no guarantee of future results.
Key Rates are shown for US Treasuries and London Interbank Offered Rate (LIBOR), the interest rate at which banks offer to lend funds (wholesale money) to one another in the international interbank market. LIBOR is a key benchmark rate that reflects how much it costs banks to borrow from each other. “Current” refers to the percentage rate as of 6/30/2018, while the rates of change are stated in basis points.
Credit Spreads shown comprise the Option-Adjusted Spread of the indices indicated, versus the US 10-Year Treasury Yield. “Current” refers to the spread as of 6/30/2018, while the rates of change are stated in basis points.
Key Indicators correspond to various macro-economic and rate-related data points that we consider impactful to fixed income markets.
- 2s10s (bps)/ 10 Yr vs 2 Yr Treasury Spread, which measures the difference between yields on 10-Year Treasury Constant Maturity Securities and 2-Year Treasury Constant Maturity Securities.
- West Texas Intermediate, which is an oil benchmark and the underlying asset in the New York Mercantile Exchange’s oil futures contract.
- Core Consumer Price Index, which measures the consumer price index excluding food and energy prices. Shown as of the prior month-end.
- Breakeven Inflation: 5 Yr %/ bps, which uses a moving 30-day average of the 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation–Indexed Constant Maturity Securities to derive expected inflation.
- Breakeven Inflation: 10 Yr %/ bps, which uses a moving 30-day average of the 10-Year Treasury Constant Maturity Securities and 10-Year Treasury Inflation–Indexed Constant Maturity Securities to derive expected inflation.
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