May 2022 | Fixed Income Markets Recap
Bonds across the global debt market rebounded in May following the worst start to a calendar year for fixed income in decades. Global aggregate bonds finished the month returning 0.27% as the index posted its first positive monthly return in 2022. US aggregate bonds fared better while gaining 0.64% in May amid intermediate yields declining along the US Treasury curve.
The latest recovery in fixed income has been bolstered by increased speculation of a global economic recession as investors seek a flight to quality. Additionally, the recent upward moves in yields have attracted market participants back into fixed income following the prolonged period of rock bottom interest rates. The surge in rates, amid quantitative tightening by central banks globally, has subsequently driven the yield on the 10-year TIPS – a proxy for real yields – into positive territory. These levels hadn’t been attained in over two years prior to the pandemic induced rate cuts in 1Q 2020. Additionally, the 5- and 10-year inflation breakevens declined in May, albeit slightly, possibly signaling to investors that price pressures may be expected to subside. The combination of rising nominal yields and disinflation may serve as a bullish catalyst for fixed income assets moving forward. Further moves higher in real yields will help to ease the fixed income turbulence seen this year as income focused investors are provided positive levels of real income.
The FOMC meeting in early May brought about a 50 bps rate hike to the federal funds rate following the 25 bps increase implemented in March. The half percentage point move by the central bank was the largest such policy rate increase since 2000 as the Fed seeks to combat the 40-year high in inflation. In conjunction with the changes to the policy rate, the Fed also highlighted plans to begin reducing the Treasury and MBS holdings on its $9 trillion balance sheet. The Fed minutes release in late May provided little surprise to investors as FOMC members broadly supported continued aggressive policy measures at the next few meetings. Furthermore, the futures market is pricing in 100% probability for 50 bps rate hikes at both the June and July FOMC meetings. This would push the federal funds rate to a range of 1.75-2.00% while currently the futures market is anticipating a 2.75-3.00% target range by year-end 2022. Although speculation exists around a future 0.75% increase to the policy rate, the pace of rate hikes by the Fed will be largely dictated by the path of inflation as measured by the central bank’s preferred inflationary gauge – the Personal Consumer Expenditures Price Index. In the face of rising rates and economic uncertainty, many market participants remain skeptical of the Fed’s ability to engineer a ‘soft landing’ as the risk of recession has increased as of late. Although the labor market remains robust, recent earnings reports have highlighted the impacts to companies’ profitability resulting from the economic landscape.
Notes & Disclosures
Index Returns – all shown in US dollars
All returns shown trailing 5/31/2022 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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