August 2023 | Fixed Income Markets Review

Market Updates September 13, 2023

Fixed income asset returns were largely negative in August, while the Bloomberg Barclays US Aggregate Bond Index returned -0.64%. Shorter duration bonds outperformed during the period, with floating rate notes, short-term Treasuries, and leveraged loans leading the market higher. Underperformers in August included emerging markets debt, municipals, and long-term Treasuries. Bond market volatility, as measured by the MOVE Index, declined to the lowest levels since the first quarter - prior to the liquidity crisis faced by US banks. Other notable fixed income trends were slight increases to credit spreads, although they remain tight and lower than historical averages.

Yields around the globe have increased in the past few weeks – most notably for intermediate- and longer-dated maturities. This rate dynamic has been driven by the recent US debt downgrade, a Bank of Japan policy change, higher energy prices, and concerns around additional Treasury issuance. The bond market backup has been meaningful as nominal rates reach levels last seen amid the Great Financial Crisis. The yield to maturity for on-the-run 10-year Treasuries ended the month at 4.09% as the 30-year Treasury closed the period at 4.21%. However, the more pronounced increase has been to real yields. Measures of real yields, shown below, have turned positive and are above most estimates of the neutral policy rate – the rate at which monetary policy is neither accommodative nor restrictive. This restrictive policy stance should help to achieve the Fed’s desired goal of disinflation toward the central bank’s target. Additionally, upward moves to real yields may serve as a headwind to risk assets and weigh on economic activity as investors have already witnessed increases in credit delinquencies and loan losses. Markets will closely monitor credit availability and further credit deterioration moving forward resulting from the lagged effects of monetary policy.

At the annual Jackson Hole retreat, Chairman Powell reiterated the Fed’s hawkish stance as the central bank is prepared to increase the policy rate further if warranted. Additionally, he expressed that monetary policy will remain restrictive until inflation moves substantially toward the 2% target. The fed funds rate target range currently stands at 5.25 – 5.50% following the 25 bps hike in July. The target range is widely expected to remain unchanged through the next FOMC meeting in mid-September, as futures markets are pricing in a 92% probability of no change. The monetary policy outlook is clouded for 4Q as traders slightly favor no changes over the possibility of hikes in November or December. As shown below, the hawkish Fed rhetoric as of late, has resulted in an upward shift in the implied fed futures curve since the end of July — as market participants embrace the ‘higher for longer’ mantra.

Disclosures

Index Returns – all shown in US dollars

All returns shown trailing 8/31/2023 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

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 2/28/2023, while the rates of change are stated in basis points.

Credit Spreads

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 2/28/2023, while the rates of change are stated in basis points.

Key Indicators

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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