October 2023 | Fixed Income Markets Review

Market Updates November 9, 2023

Fixed income performance was largely negative in October amid rising intermediate- and long-term yields weighing on the asset class. The 10-year Treasury witnessed a volatile month as the yield to maturity peaked above 5% for the first time since the Great Financial Crisis. Ultimately, the 10-year yield pulled back slightly and finished at 4.90% — a 33 bps increase from the prior month-end. The rise in longer dated yields has been in response to resilient economic data, increased Treasury supply, rising term premiums, and concerns around fiscal budget deficits. Furthermore, inflation has remained sticky — adding upward pressure to yields — while the September headline CPI data came in hotter than expected. Longer-term inflation breakevens (i.e., 5- and 10-year) have only seen modest increases as market participants do not anticipate runaway inflation. However, the 1-year inflation expectations measured by the University of Michigan rose by 100 bps to 4.2% in October. This trend of stubborn inflation supports the higher for longer mantra from the Fed.

The latest FOMC meeting resulted in no change to the fed funds rate, while the target range remains at 5.25-5.50%. The Fed unanimously elected to hold rates steady for the second consecutive meeting. Chairman Powell reiterated how the committee is proceeding carefully on policy decisions, and the FOMC is not considering or discussing rate cuts. He also asserted how actual inflation is still not near the central bank’s target, and monetary policy will remain restrictive until progress is made. Given the pace of tightening, the full effects of past hikes will not be felt for some time as monetary policy operates with a long lag. These hawkish comments have appeared to simmer investor expectations for rate cuts anytime soon. The next FOMC meetings will be held in December and January, and the futures market favors no change to the policy rate in either meeting. As shown below, the Fed funds futures implied curve indicates that investors believe the policy rate will remain above 5% until September 2024.

The surge in nominal and real yields has prompted tightening of US financial conditions in recent weeks. Per Goldman Sachs, the financial conditions tightening since August - measured by their index below – has been equivalent to 75 bps of Fed rate hikes. The FOMC has welcomed the bond yield backup as it suggests the central bank will not need to implement further rate hikes to slow economic growth and inflation. Further evidence of financial conditions tightening is apparent in the US housing market, while the average 30-year fixed mortgage rate surged above 8% in October – levels last seen in the summer of 2000.

Notes & Disclosures

Index Returns – all shown in US dollars

All returns shown trailing 10/31/2023 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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