November 2023 | Fixed Income Markets Review

Market Updates December 8, 2023

Fixed income markets surged higher in November amid declining yields and risk appetite returning to markets. The yield for on-the-run 10-year Treasuries began the month at 4.90% before declining 54 bps to close the period at 4.36%. The Bloomberg US Aggregate Bond Index had its best-performing month since May 1985, gaining 4.53%. The rate reprieve served as a tailwind for bond investors, who have faced a challenging market environment during the Fed’s tightening cycle.

Prior to the November bond rally, market participants observed bear steepening along the US Treasury curve. This re-emergence of the term premium — the additional compensation investors demand for holding longer-maturity debt — has aided the central bank’s efforts to curb inflation. Market forces driving rates higher puts less pressure on the Fed to implement further increases to the policy rate. The recent decline in yields, however, reversed the bear steepening trend, leading to robust performance across the fixed income landscape.

The November FOMC meeting concluded with no change to the fed funds rate, maintaining the target range at 5.25-5.50%. The Fed's unanimous decision to keep rates steady for the second consecutive meeting was underscored by Chairman Powell's reiterated hawkish stance, emphasizing that rates would persist at restrictive levels in the foreseeable future. Although markets anticipate a monetary policy pivot, the Fed cautions against this idea, stating that the central bank may implement another rate hike if warranted by economic data. However, market participants remain skeptical about the sustainability of the hawkish stance. While pauses are expected at the December and January FOMC meetings, futures markets are pricing in cuts to the fed funds rate for March. The potential for a policy rate cut in the first quarter has notably increased as of late, while futures predict a 55% probability of a 25 bps move lower. As shown below, market expectations have shifted the implied fed funds curve meaningfully lower since the end of October. Economic releases in November highlighted disinflationary progress, with PCE, CPI, and PPI all registering declines on a year-over-year basis. This trend supports investors' optimism and aligns with market expectations of a less restrictive monetary policy in 2024. These economic reports will continue to serve as crucial indicators of whether the Fed has successfully tamed inflation without triggering a recession.

Moody's adjusted its outlook on the US credit rating from "stable" to "negative," citing substantial fiscal deficits and the elevated rate environment. Despite the outlook shift, the nation's AAA rating was maintained, with Moody's acknowledging the resilience in economic activity. This follows the US credit rating downgrade in August when Fitch lowered the rating from AAA to AA+.

Notes & Disclosures

Index Returns – all shown in US dollars

All returns shown trailing 11/30/2023 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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