Fixed Income Market Update

May 27, 2022

What a difference a week makes. Markets shrugged off the higher rate fears, shook off the recession worries and got down to buying.

From last Thursday, May 19th through yesterday May 26th, many Bloomberg fixed income indices rallied strongly. Led by the High Yield Index up 2.80%, closely followed by the Municipal Bond index up 2.74%, and investment grade corporate bonds up 1.90%.

Why the rally? Even as the Fed continues to plan multiple 50 basis point increases to the Overnight rate (And shrink their balance sheet) their biggest tool has already been at work. That tool? The bond market. The Fed has carefully executed a communications plan, including meetings, press conferences, speeches and perhaps a few well placed news articles, that sent a clear message: Expect Higher Rates. And the bond market listened. The Benchmark 10 Year US Treasury which started the year at 1.51%, hit a high on May 6th of 3.131%. With that rise, mortgage rates increased and recent economic releases show housing starts and sales are slowing significantly.

In their earning calls, the management of many companies, particularly retailers, noted a significant slowdown in foot traffic, orders and future growth.

With all this bad news, optimism broke out in the bond market. Growth is not out of control and perhaps the Fed will not need to raise rates as high. Looking at the CME Fed Watch Tool, the options market expects the Fed increases to top out at 2.75%-3%, this is down from 3-3.25% last week. Most importantly, it’s not going up!

Since that recent high, the 10 year yield has dropped, but other sectors have lagged. With such a quick economic reaction to higher rates, the potential of the Fed to avoid a recession may have improved, emboldening investors to take on risk. We are not out of the woods yet, and what we mentioned last week remains favorable now, short dated US Treasuries and high quality municipal bonds remain good values, even after this run.

-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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CME Fed Watch Tool

Source: CME Group 5-27-22
See Disclosures below for index descriptions

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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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