November 2022 | Fixed Income Markets Review

Market Updates December 12, 2022

Fixed income assets rallied in November buoyed by declining yields for intermediate- and long-term maturities. Shorter dated yields, however, rose during the month driving a steeper inversion of the Treasury curve. The yield-to-maturity on 3-month T-bills ended the period at 4.38% resulting in the largest inverted yield curve since January 2001 when measured against the 10-year. Furthermore, the 2-10-year spread – another favored measure – ended November at 69 bps. This curve inversion is the largest such level witnessed by investors since the Volcker led era in the early 1980s. In addition to the level, the duration of this year’s inverted yield curve is also notable. The 2–10-year spread inversion has lasted 107 days through the end of the month – already ranking as the sixth longest of all time going back to 1977. Fixed income investors anticipate this trend to continue well into 2023 as restrictive monetary policy and slowing economic growth continue to drive the yield curve shape.

At its November meeting, the FOMC hiked the Fed funds rate by another 75 bps – raising the target range to 3.75-4.00% and marking the fourth consecutive 75 bps increase. This policy measure was accompanied by hawkish Fed rhetoric as Chairman Powell stated it’s too premature to think about or talk about pausing rate hikes. Furthermore, he emphasized how the terminal rate level and the duration of restrictive monetary policy are far more important than when to moderate the pace of increases. Nevertheless, market participants continue to speculate on the December meeting as the futures market is currently pricing a 91% probability of a 50 bps move. As investors forecast 2023 policy decisions, futures are favoring a second 50 bps increase at the February meeting. The ‘higher for longer’ mantra recently echoed by the central bank has resulted in upward moves to the peak terminal rate through next year. The implied terminal rate is expected to peak in May at 4.975% while the futures market is pricing in policy rate cuts at the June 2023 FOMC meeting. Amid the challenging economic landscape, the Fed continues to reiterate the 2% inflation target over time and how further policy measures will consider the cumulative effect of tightening and policy lags.

The October CPI release fared better than expected as the annualized CPI fell to the lowest level since January. The services economy is still adding upward pressure to prices although energy and used car costs have softened as of late. Producer prices during the month, as measured by the PPI, were also softer than expected as companies look to combat margin pressures as input costs have surged.

Bond market volatility, measured by the MOVE index, declined over the month from its 2022 peak set in October. Although credit spreads followed a similar course, investment-grade and high yield OAS remain near long-term historical levels. Sell-side strategists forecast spread widening in the first quarter of 2023 as central banks continue quantitative tightening to slow economic activity.

Notes & Disclosures

Index Returns – all shown in US dollars

All returns shown trailing 11/30/2022 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

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

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

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.

General Disclosure

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