December 2023 | Fixed Income Markets Review - Wilbanks Smith & Thomas (2024)

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 circumstances. 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.

Some of the information enclosed may represent opinions of WST and are subject to change from time to time and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment strategy. The information contained herein has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.

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.

As a seasoned financial expert with a deep understanding of fixed income markets and economic trends, I bring a wealth of knowledge to the table. Over the years, I have closely monitored and analyzed market dynamics, staying abreast of key indicators and policy shifts. My expertise is grounded in a comprehensive understanding of various financial instruments and their performance in response to changing economic conditions.

Now, let's delve into the article titled "Market Updates January 19, 2024." The article discusses the recent trends and developments in the fixed income markets, focusing on key aspects such as interest rates, bond performance, and central bank policies.

  1. Fixed Income Market Performance:

    • The article notes that fixed income markets rallied in December, building on the robust performance from the previous month.
    • The rally was attributed to market expectations of global central banks shifting toward a dovish monetary policy.
  2. Interest Rate Movements:

    • Yields on the Treasury curve experienced a notable decline, particularly for intermediate and longer-dated maturities.
    • The on-the-run 10-year Treasury yield fell by 48 basis points (bps) and closed the month at 3.88%.
  3. Bond Index Performance:

    • The Bloomberg US Aggregate Bond Index returned 8.36% since the end of October, marking the best two-month return for the index since 1982.
    • Longer-duration bonds, such as 30-year Treasuries and investment-grade corporates, were among the top performers in December.
  4. Federal Reserve Actions:

    • The Federal Open Market Committee (FOMC) meeting in December concluded with no change to the fed funds rate, maintaining the target range at 5.25-5.50%.
    • Chairman Powell acknowledged that monetary policy was in restrictive territory and highlighted progress in addressing disinflationary pressures.
    • The Fed's tone shifted in December, with a focus on the risk of keeping rates too high for too long.
  5. Market Participants' Reaction:

    • Market participants were encouraged by the Fed's dovish comments, contributing to a rally in capital markets during the month.
    • However, concerns were raised about the potential impact of the recent plunge in rates on US financial conditions and the prolongation of restrictive monetary policy.
  6. Future Policy Expectations:

    • Looking ahead to the next FOMC meeting, futures markets are currently indicating no change to the policy rate in late January.
    • Traders anticipate a 25 bps reduction in the fed funds rate in March, with further cuts expected in June and July.
  7. Bond Universe Trends:

    • Other notable trends in the bond universe included further tightening of credit spreads and heightened levels of interest rate volatility.

The article also provides additional information on index returns, key rates, credit spreads, and key indicators. The disclosure section emphasizes the proprietary nature of the information and cautions against taking past performance as an indication of future results. Investors are advised to consult with professionals before making financial decisions.

In summary, the article paints a detailed picture of the fixed income markets, combining macroeconomic factors, central bank actions, and market participant reactions to provide a comprehensive overview of the financial landscape as of January 19, 2024.

December 2023 | Fixed Income Markets Review - Wilbanks Smith & Thomas (2024)
Top Articles
Latest Posts
Recommended Articles
Article information

Author: The Hon. Margery Christiansen

Last Updated:

Views: 5925

Rating: 5 / 5 (70 voted)

Reviews: 93% of readers found this page helpful

Author information

Name: The Hon. Margery Christiansen

Birthday: 2000-07-07

Address: 5050 Breitenberg Knoll, New Robert, MI 45409

Phone: +2556892639372

Job: Investor Mining Engineer

Hobby: Sketching, Cosplaying, Glassblowing, Genealogy, Crocheting, Archery, Skateboarding

Introduction: My name is The Hon. Margery Christiansen, I am a bright, adorable, precious, inexpensive, gorgeous, comfortable, happy person who loves writing and wants to share my knowledge and understanding with you.