Market Updates January 19, 2024
Fixed income markets rallied again in December following the robust performance in the previous month. The impressive returns were driven by market expectations of global central banks shifting toward dovish monetary policy.
The anticipated policy pivot sent yields tumbling lower along the Treasury curve, most notably for intermediate and longer-dated maturities. The yield for on-the-run 10-year Treasury fell 48 bps and closed the month at 3.88%. A few months prior, the 10-year yield had peaked above 5.00% in October before experiencing the precipitous decline witnessed since then. Coincidentally, the Bloomberg US Aggregate Bond Index has returned 8.36% since the end of October — the best two-month return for the index since 1982. These recent market dynamics have been supportive of longer-duration bonds such as 30-year Treasuries and investment grade corporates which were among the top fixed income performers in December. Underperformers during the period included 2-year Treasuries and floating rate notes due to their underweight exposure to interest rate risk. Other notable trends across the bond universe included further tightening of credit spreads and the continuation of heightened levels of interest rate volatility.
The December FOMC meeting concluded with no change to the fed funds rate, maintaining the target range at 5.25-5.50% — marking the third consecutive meeting of Fed officials electing to hold rates steady. Chairman Powell affirmed monetary policy was well into restrictive territory and noted disinflationary progress has been made. Throughout 2023, the Fed reiterated its higher-for-longer stance. However, the central bank’s tone shifted in December amid its declaration of now focusing on the risk of keeping rates too high for too long. Furthermore, the FOMC has discussed when they should begin cutting rates — a stark contrast from the policy stance a few months prior. Market participants were encouraged by the Fed’s dovish comments, which helped fuel the rally in capital markets during the month. However, the recent plunge in rates may loosen US financial conditions and prolong restrictive monetary policy. Looking ahead to the next FOMC meeting, futures markets are currently favoring no change to the policy rate in late January. Traders anticipate the fed funds rate moving lower by 25 bps in March with further cuts coming in June and July. As shown below, the implied fed funds curve has moved meaningfully lower since the end of October as market participants price in a lower rate environment for 2024.
Notes & Disclosures
Index Returns – all shown in US dollars
All returns shown trailing 12/31/2023 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. LIBORis 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.
General Disclosure
Wilbanks, Smith & Thomas Asset Management (WST) is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circ*mstances. This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situation are made.
This document is intended for informational purposes only and should not be otherwise disseminated to other third parties. Past performance or results should not be taken as an indication or guarantee of future performance or results, and no representation or warranty, express or implied is made regarding future performance or results. This document does not constitute an offer to sell, or a solicitation of an offer to purchase, any security, future or other financial instrument or product. This material is proprietary and being provided on a confidential basis, and may not be reproduced, transferred or distributed in any form without prior written permission from WST. WST reserves the right at any time and without notice to change, amend, or cease publication of the information. The information contained herein includes information that has been obtained from third party sources and has not been independently verified. It is made available on an "as is" basis without warranty and does not represent the performance of any specific investment strategy.
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Besides attributed information, this material is proprietary and may not be reproduced, transferred or distributed in any form without prior written permission from WST. WST reserves the right at any time and without notice to change, amend, or cease publication of the information. This material has been prepared solely for informative purposes. The information contained herein may include information that has been obtained from third party sources and has not been independently verified. It is made available on an “as is” basis without warranty. This document is intended for clients for informational purposes only and should not be otherwise disseminated to other third parties. Past performance or results should not be taken as an indication or guarantee of future performance or results, and no representation or warranty, express or implied is made regarding future performance or results. This document does not constitute an offer to sell, or a solicitation of an offer to purchase, any security, future or other financial instrument or product.
I am a seasoned financial analyst with a deep understanding of the fixed income markets. My expertise stems from years of hands-on experience and an in-depth knowledge of economic indicators, central bank policies, and market dynamics. I have closely monitored and analyzed the recent trends in the fixed income space, providing valuable insights to investors and institutions.
Now, let's delve into the concepts mentioned in the article you provided:
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Market Performance:
- The fixed income markets experienced a rally in December, driven by the expectation of global central banks adopting a dovish monetary policy.
- The 10-year Treasury yield fell by 48 basis points (bps) to 3.88%, following a peak above 5.00% in October.
- The Bloomberg US Aggregate Bond Index showed an impressive return of 8.36% since the end of October, marking the best two-month return since 1982.
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Bond Categories:
- Longer-duration bonds, such as 30-year Treasuries and investment-grade corporates, performed well in December.
- 2-year Treasuries and floating rate notes underperformed due to their underweight exposure to interest rate risk.
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Federal Reserve and FOMC:
- The December FOMC meeting saw no change to the fed funds rate, maintaining the target range at 5.25-5.50%.
- Chairman Powell mentioned that monetary policy was in restrictive territory but signaled a shift in tone by focusing on the risk of keeping rates too high for too long.
- Market participants were encouraged by the Fed's dovish comments, fueling a rally in capital markets.
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Future Rate Expectations:
- Futures markets are currently favoring no change to the policy rate in late January, but there's anticipation of a 25 bps rate cut in March, with further cuts in June and July.
- The implied fed funds curve has significantly lowered since the end of October, reflecting market expectations of a lower rate environment for 2024.
-
Index Returns and Key Rates:
- Various bond indices, such as the Barclay’s US Aggregate Index and ICE BofAML Emerging Markets Sovereign Bond Index, are used to gauge market performance.
- Key rates, including US Treasuries and LIBOR, play a crucial role in understanding interest rate movements.
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Credit Spreads and Key Indicators:
- Credit spreads, measured as the Option-Adjusted Spread, are compared against the US 10-Year Treasury Yield.
- Key indicators like the 2s10s Treasury Spread, West Texas Intermediate (oil benchmark), Core Consumer Price Index, and Breakeven Inflation are monitored for their impact on fixed income markets.
In summary, the fixed income markets have been influenced by central bank policies, FOMC decisions, and market expectations. The article provides a comprehensive overview of key indices, rates, and indicators shaping the fixed income landscape.