February 2023 | Fixed Income Markets Review
Fixed income markets faced headwinds during the month as rising yields along the Treasury curve weighed on asset class performance. This rate dynamic led to interest rate volatility surging in February, as measured by the MOVE Index. The upward shift in yields was more pronounced on the short-end of the curve as the yield-to-maturity for 1-year Treasuries surpassed 5% for the first time since 2007. Bond investors also witnessed the 2-year Treasury yield increase 59 bps to 4.80% — levels last seen amid the Great Financial Crisis. Coincidently, the Treasury curve remains considerably inverted. The 2-10 year spread inversion has lasted 168 trading days through the end of February — marking the fourth longest inversion on record going back to 1977. Sell-side strategists anticipate this trend to continue throughout 2023 as restrictive monetary policy and slowing economic growth continue to drive the yield curve shape. The moves higher in rates led to longer-duration assets being among the worst performers, while shorter maturity bonds fared better during the month. Additionally, emerging markets debt saw significant losses during the period as a result of the strengthening US dollar.
The latest FOMC meeting resulted in the target policy rate increasing by 25 bps, and the target range now stands at 4.50 to 4.75%. The subsequent release of the Fed minutes supported the narrative that the fed funds rate may remain “higher for longer” as the lags of monetary policy work through the economy. Although financial conditions loosened since 4Q, the trend reversed in February as the Goldman US Financial Conditions Index moved higher, as shown below. Looking ahead to the next FOMC meeting, futures markets now favor a 50-bps hike to the central bank’s overnight rate. Furthermore, there is a 54% probability that investors will see the target range reaching 5.25-5.50% by May. Amid speculation around a Fed policy pivot, the market is currently pricing at a peak terminal rate of 5.64% in September 2023. The implied fed funds futures curve, shown below, anticipates a decline in the policy rate in the fourth quarter and into 2023. However, the direction of monetary policy will depend on future economic data points and the path of inflation.
The February release of the Core PCE, the Fed’s preferred inflation measure, accelerated month-over-month — increasing to 0.6% from the prior period. On an annualized basis, core PCE was reported at 7.1% — marking the highest level since June 2022. Producer prices, as measured by the headline PPI, declined on a year-over-year basis for the seventh consecutive month. This downward momentum provides corporations some relief as surging input costs have resulted in margin compression.
Notes & Disclosures
Index Returns – all shown in US dollars
All returns shown trailing 2/28/2023 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 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 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 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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