September 2023 | Fixed Income Markets Review

Market Updates October 18, 2023

Fixed income assets declined in September, with the Bloomberg US Aggregate Bond Index falling -2.54% for the month. Rising yields along the Treasury curve weighed on asset class performance. The yield to maturity for on-the-run 10-year Treasuries surged 48 bps and ended the period at 4.57% - the highest level since the Great Financial Crisis. The bond market backup has been pronounced on a nominal basis, but the increases to real yields have been arguably more meaningful. The graph below shows rising real yields, measured by the 10-year TIPS, which have led to the tightening of financial conditions. This trend is encouraging for monetary policymakers as the Fed has implemented the most aggressive tightening cycle on record to combat inflationary pressures.

During the month's FOMC meeting, the Fed elected to keep the policy rate unchanged as the target range stands at 5.25 – 5.50%. Chairman Powell reiterated the Fed's hawkish stance and reminded investors that officials are prepared to raise rates further if warranted. He also asserted that monetary policy will remain restrictive until inflation moves sustainably lower toward the central bank's goal. The dot plot from the FOMC meeting was notable as 12 of 19 Fed officials favor another rate hike in 2023. The 'higher for longer' mantra from the Fed has had a discernible effect on the Fed futures implied curve, as shown below. Before September, investors anticipated the policy rate to fall below 5% in mid-2024. However, the recent hawkish tone has shifted the implied curve upward, leaving market participants to embrace a higher-rate environment. The next FOMC meeting will be held in November, and the futures market favors no change to the target range – with a 31% probability of another rate hike.

Concerns arose in September regarding a government shutdown as Moody's warned that this event would negatively impact its credit rating for the US. The rating agency noted how a shutdown would emphasize weakness in US governance and fiscal deterioration relative Aaa-rated sovereigns. Following last month's Fitch downgrade, Moody's remains the last major rating agency to give the US its Aaa rating. However, the US narrowly averted a government shutdown via a bipartisan spending bill that will keep the government funded through mid-November. Aside from the credit rating impact, this development is meaningful as the heavily watched government economic data will continue uninterrupted. Economic and labor market data are essential inputs for the Fed as they determine the future path of monetary policy.

Notes & Disclosures

Index Returns – all shown in US dollars

All returns shown trailing 9/30/2023 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, is 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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