Fixed Income Market Update

April 29, 2022

As we mentioned last week, over the next year, we think there are three scenarios for the economy and the fixed income market. All three scenarios hinge on the trajectory of inflation. Inflation is either going to peak and cool off, or it’s not peaking or cooling off. If it’s the former, the Fed might be able to avoid a recession by not raising rates beyond the “Neutral” rate (A theoretical overnight fed funds rate that supports economic growth without an inflationary overheat). If it’s the latter, The Fed will keep raising interest rates until the inflationary forces in the economy are exhausted, also known as a recession.

This week we got some bad readings on inflation. The Fed’s favorite measure for inflation, the PCE Deflator came in at 6.6% (The highest since 1982). And while the GDP report showed a quarter over quarter contraction of -1.4%, the consumer spending portion of the index remains strong, growing 2.3%. Friday, the Employment Cost Index was released showing wages for all civilians increased 4.5% year over year. This increase happened even as nonfarm payrolls gains have been outsized and labor shortages have eased as more workers rejoin the workforce. This combination suggests demand for labor still exceeds supply by a sizable margin.

Fed Chair Jerome Powell captures the essence of the current labor market when he says it’s “too hot.” As more readings are released, showing more evidence of inflation, the prospect of the Fed achieving a soft landing gets dimmer.

Fed Chair Jerome Powell captures the essence of the current labor market when he says it’s “too hot.” As more readings are released, showing more evidence of inflation, the prospect of the Fed achieving a soft landing gets dimmer.

-Peter Baden, CFA
Chief Investment Officer

Source of Interest Rates: US Treasury Yields via Bloomberg LP see footnote at the bottom of this e-mail for which indexes are used.
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William (Kip) Weese
SVP, Intermediary Sales
Northeast & South West
(508) 423-2269
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Art Blackman
VP, Intermediary Sales
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Rick Bell
VP, Intermediary Sales
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Indexes used for Fixed Income Returns
U.S. Aggregate – The Bloomberg US Aggregate Bond Index (Symbol: LBUSTRUU)
U.S. Treasury – The Bloomberg US Treasury Index (Symbol: LUATTRUU)
Corporate – The Bloomberg US Corporate Bond Index (Symbol: LUACTRUU)
U.S. Corporate High Yield – The Bloomberg US Corporate High Yield Bond Index (Symbol: LF98TRUU)
Taxable Municipal Index – The Bloomberg Municipal Index Taxable Bond Index (Symbol: BTMNTR)
Tax-Free Muni Index- The Bloomberg Municipal Bond Index (Symbol: LMBITR)
Tax-Free Muni 7-Yr Index – The Bloomberg Municipal Bond 7 Year (6-8) Index (Symbol: LM07TR)

Indexes used for AAA Municipal Yields

2 Year: BVAL Municipal AAA Yield Curve (Callable) 2 Year (Symbol: CAAA02YR BVLI)

5 Year: BVAL Municipal AAA Yield Curve (Callable) 5 Year (Symbol: CAAA04YR BVLI)

10 Year: BVAL Municipal AAA Yield Curve (Callable) 10 Year (Symbol: CAAA10YR BVLI) 

30 Year: BVAL Municipal AAA Yield Curve (Callable) 30 Year (Symbol: CAAA30YR BVLI)

Indexes used for US Treasury Yields

2 Year: US Generic Govt 2 Year Yield (Symbol: USGG2YR)

5 Year: US Generic Govt 5 Year Yield (Symbol: USGG5YR)

10 Year: US Generic Govt 10 Year Yield (Symbol: USGG10YR)

30 Year: US Generic Govt 30 Year Yield (Symbol: USGG30YR)

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