The 4th quarter Treasury and spread rally rescued the broad fixed income market from another year of negative or barely positive (depending on sector) returns. In traditional bond market fashion, however, we find much to worry about with stretched valuations in most of the spread sectors and an uncertain path forward for the economy and interest rates.
In this quarter’s update, we begin by looking at interest rates at the very broadest levels, i.e. Treasury markets and Federal Open Market Committee (FOMC) actions. We then take stock of the fixed income landscape, looking at current market metrics against a historical backdrop.
As we embark on the second half of 2023, we find a market in conflict. Despite the continued (relative) hawkishness by the Federal Reserve Open Market Committee (FOMC) and its members, most risk assets have continued to perform well.
For fixed income markets, volatility remains the recurring theme across fixed income markets. We have discussed this for more than a year, and we are once again left to contemplate volatility around the market direction narrative versus realized volatility in fixed income markets.
For each of the first three quarters of 2022, we spent the opening paragraph of this piece finding new and interesting ways to describe just how bad fixed income performance was, across all sectors and tenors. Yet despite capping one of the worst years for fixed income historically, 4Q22 managed to provide positive total and excess returns.
