March 2022 | Fixed Income Markets Review
Fixed income assets continued to face headwinds in March while market participants navigate the uncertainty around the Russia-Ukraine conflict and hawkish actions by the Fed. U.S. bonds experienced the worst quarter since 1980 as the Bloomberg Barclays U.S. Aggregate Bond Index returned -5.9% in the first three months of 2022. Furthermore, global aggregate bonds have fared even worse experiencing a first quarter return of -6.2%. In fact, when reviewing performance on a monthly basis for the Bloomberg Barclays Global Aggregate Bond Index, the benchmark has fallen -10.6% from the high in January 2021. This decline has equated to the largest such drawdown for the index data stretching back to 1990 – even surpassing the -10.1% drawdown in 2008 amid the Great Financial Crisis.
The fixed income sell-offs are largely a function of the recent spike in bond yields as markets price in the expected hawkish policy measures from the Fed. The swift reaction in the bond market has resulted in bearish curve flattening while the geopolitical conflict in Eastern Europe exacerbates the upward pressure on prices. Although increases in rates have been observed along the entire curve, the short- to intermediate-term yields have experienced more pronounced surges relative to the long end of the curve. On a rolling three-month basis, fixed income investors have seen the yield on the 2-year Treasury rise 156 bps - the largest move since April 1994. Additionally, the one-month increase in the 5-year yield was 71 bps resulting in an upward move markets hadn’t seen since April 2004. The shifting dynamic along the yield curve has culminated in several inversions among notable yield curve pairings. Following the FOMC meeting in mid-March, bond markets saw a brief inversion of the 5-10 year spread while later in the month another inversion transpired in the 5-30 year spread. These inversions had last occurred pre-financial crisis and have led to investor concerns around a potential monetary policy mistake by the Fed and recession signaling. However, other investors have pushed back against this notion as these inversions are not as alarming as those between the 3-month – 10-year spread and 2-10 year spread.
At the FOMC meeting during the month, the Fed officially announced a 0.25% increase to the federal funds rate as the central bank seeks to tamper inflation. The rate increase came as no surprise to markets although much debate surrounded whether the Fed hiked rates enough. Some investors and Fed officials were vocal about increasing the policy rate by 0.50% and markets are now forecasting 50 bps hikes at both the May and June FOMC meetings. When reviewing the last meeting’s dot plot, all but one FOMC member believes the fed funds rate will be above 2.25% by year-end 2023. Furthermore, the committee sees the longer run policy rate topping out around 2.5% which would be the lowest projection for long term rates since the Fed began publishing dot plots a decade ago.
Notes & Disclosures
Index Returns – all shown in US dollars
All returns shown trailing 3/31/2022 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 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 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 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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