June 2023 | Fixed Income Markets Review

Market Updates July 14, 2023

Fixed income assets faced mixed results in June as the Bloomberg Barclays US Aggregate Bond Index returned -0.36% for the month. Investors witnessed rising yields for most tenors along the US Treasury curve. Most notable was the 48 bps increase in yield for on-the-run 2-year Treasuries, as it ended the month at 4.87%. Bond market volatility, as measured by the MOVE Index, declined over the period, although it remains elevated historically due to large fluctuations in yields. Credit spreads for investment grade and high yield bonds also fell in June and hover near long-term averages.

The latest FOMC meeting resulted in a hawkish pause to policy rates as Chairman Powell emphasized a lack of progress on core inflation. A significant takeaway from the meeting was the focus on the 50 bps increase in the 2023 median Fed dot plot — further reflected in Powell’s comments at the ECB forum, where he stated that policy has not been restrictive for long enough. Additionally, he noted that the rate pause would provide the FOMC with any indications of market stress from lags of monetary policy tightening. As we look ahead, the federal funds futures market is currently pricing in an ~88% probability of a 25 bps rate hike at the July meeting — increasing the target range to 5.25-5.50%, and futures traders currently favor rates to end the year within that range. As of late, the hawkish rhetoric from the Fed has led to an increase in the implied federal funds rate curve, as shown in the graph below. By the end of May, rates were expected to decline as investors head into 2024. However, the recent hawkish tone has resulted in market participants anticipating the federal funds rate to remain above 5% heading into the next year.

Some Fed officials have proclaimed that rates need to be more restrictive, leading investors to speculate about the appropriate level of real rates. There are several measures of real rates in the economy, including 10-year TIPS, effective federal funds rate less 1-year inflation breakeven, and effective fed funds rate less core CPI. As shown below, each measure highlights that interest rates have been more stimulative than restrictive over the past 2-3 years. In conjunction with the liquidity injected into the banking system, this environment provides investors hope that monetary policy will not force a severe economic contraction. Chairman Powell has previously encouraged using the effective fed funds rate less 1-year inflation breakeven as the Fed’s preferred measure. This estimate does indicate how real rates have been positive since January 2023, but there is room for further hawkish policy decisions.

Notes & Disclosures

Index Returns – all shown in US dollars

All returns shown trailing 6/30/2023 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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