January 2023 | Fixed Income Markets Recap
Fixed income assets rallied to begin 2023 following the historic losses suffered by bond investors last year. Interest rate volatility, as measured by the MOVE Index, fell while the index dipped below 100 for the first time since June 2022. Short-term Treasury rates rose in January as the yield for 3-month T-bills ended the period at 4.66% — the highest level since 2007. Conversely, intermediate- and long-term Treasury yields fell, reflecting the more benign recent inflation data and continuing the declines since rates peaked in October. The yields on 10-year and 30-year Treasuries ended the month at 3.53% and 3.66%, respectively. The downtrend in rates has served as a catalyst for improved performance by longer-duration assets, most notably 30-year Treasury bonds. The rolling 3-month return for the S&P 30-Year Treasury Bond Index through January was 10.95% — the best performance since the Fed rate cuts at the onset of the pandemic. Other notable performers during the month include emerging markets debt, which rallied as the US dollar weakened. The depreciation in the dollar since the fourth quarter has been pronounced and has provided a tailwind for emerging market companies holding USD-denominated debt obligations.
The FOMC increased the Fed Funds policy rate by 25 bps in its January meeting, and the target rate now stands at 4.50 to 4.75%. In his press conference, Chairman Powell emphasized the Fed’s commitment to maintaining restrictive monetary policy until inflation falls to the 2% target. He also pushed back against the narrative of easing US financial conditions although measures from Goldman Sachs point to the loosest conditions since mid-2022. Amid market speculation about a Fed policy pivot as inflation falls, the futures market is pricing in a 95% probability of another 25 bps hike at the March FOMC meeting and another quarter-point hike in May but believes the Fed will hold rates steady throughout the remainder of 2023. The direction of monetary policy will depend on future economic data points and the path of inflation.
The headline CPI figure released in January ticked down to 6.5% from 7.1% in the prior report on a year-over-year basis. The decline was driven by lower prices for energy, food, and used cars, although consumers experienced upward pressures in shelter inflation. Producer prices, as measured by the headline PPI, were softer than expected during the month’s report. This downward move provides corporations some relief as surging input costs have resulted in margin compression.
While Wall Street anticipates a modest rise in default rates in 2023, markets anticipate these rates remaining below their long-term historical averages. Issuer fundamentals remain relatively healthy despite a potential recession, while near-term maturities are expected to be minimal following the wave of refinancing in 2020-21.
Notes & Disclosures
Index Returns – all shown in US dollars
All returns shown trailing 1/31/2023 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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