October 2022 | Fixed Income Markets Review
Fixed income assets faced mixed results in October as further increases in yields and heightened bond market volatility weighed on asset class performance. Interest rates moving higher was a major theme in October as bond investors witnessed surging yields along the entire Treasury curve. The bond yield backup weighed on capital markets as the yields on notable maturities hit historic levels. The 2-year yield ended the month at 4.49%, marking the highest rate in 15 years, while the 10-year yield eclipsed levels last seen in July 2008. Meanwhile, longer-dated maturities faced no reprieve from the rate backup while the 30-year yield peaked at 4.40% intra-month – an 11-year high water mark. In addition to the high levels, the pace of change in rates has also been pronounced. When viewing the 2-year Treasury yield on a rolling 60-day basis, the move through October was the largest such increase in that maturity going back to 1994.
As mentioned, interest rate volatility has surged in 2022 in the face of quantitative tightening. Volatility in the bond market, as measured by the MOVE Index, has accelerated as of late with the index approaching measures last experienced amid the Great Financial Crisis, as shown below.
Some developed market central banks have implemented monetary policy intervention while investors observe these measures for signs of a pivot. The Bank of Japan recently intervened to support the yen combating further weaking against the US dollar as well as conducting emerging bond buying operations. Furthermore, South Korea has announced a $35 billion liquidity supply program to help bolster credit markets. Domestically, the Treasury has been considering buying off-the-run bonds prompting some market participants to call for a 2023 shift from ‘quantitative tightening’ to ‘quantitative tinkering’.
As investors speculate on the future peak in the fed funds rate, some economists anticipate a terminal rate of 5.00-5.25% in 2023 – due to continuous upside surprises from inflation data. Looking past the November rate hike to the FOMC meeting in December, market participants debate whether the Fed will increase the policy rate another 0.75% or reduce the level of increases to 50 bps. Currently, the futures market is favoring the slowdown in hikes while pricing in a 67% probability of a 50 bps increase in December. Furthermore, futures markets are revealing a 52% probability of the target policy rate being 4.75-5.00% by the February 2023 FOMC meeting. The central bank continues to reiterate the goal of reaching its 2% inflation target over the longer term as its recent policy measures aim to tamp down persistent inflation. However, concerns have been echoed by investors around the Fed implementing the tightening cycle too quickly leading to an unnecessarily sharp slowdown in economic activity. In response, the Fed has emphasized that future policy decisions will be dependent on the cumulative effect of quantitative tightening, policy lags and further developments in economic data.
Notes & Disclosures
Index Returns – all shown in US dollars
All returns shown trailing 10/31/2022 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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