January was an exciting month across the globe in the financial markets. To catch you up to speed on what happened in the fixed income markets and where we stand today, some of the highlights are below.
At their January meeting, the FOMC maintained the course for tapering, meaning that net new asset purchases will come to an end in March. Chair Jerome Powell emphasized in his post-meeting press conference that the Committee views the economy and labor market as both being in very good shape, which in the market’s eyes, opened the runway for the Fed to be aggressive in their policy actions in 2022. Market expectations for Fed Funds rate hikes have increased from three at the start of the year to current forecasts of five or six. Anticipation of a more aggressive FOMC combined with continued high inflation and a strong trend in employment data have propelled interest rates higher across the board so far this year.
The Treasury market has seen substantial yield increases year-to-date. The short end of the curve, strongly pushed by increasing expectations for Fed Funds hikes, have led the way, highlighted by the 2- and 3-year Treasuries which have each gained over 58 basis points in yield. The intermediate and long parts of the curve are higher as well, with the 10- and 30-year maturities moving higher by 42 and 33 basis points, respectively. This has led to a slight curve flattening which highlights the increased opportunity for fixed income investors on the short to intermediate part of the curve.
Investment-grade corporates have been steadily getting more attractive not just year-to-date but over the past few months. Driven by both the higher benchmark (Treasury) yields mentioned above as well as by widening spreads, many pockets of the corporate bond market are offering investors the highest yields since the start of the pandemic. Since the start of the year, the BBB corporate curve has increased in yield by nearly 50 basis points from 2 years out to 10 years. Taking that trend back even further, since the start of 2021, BBB corporate yields from 2 to 6 years have more than doubled, while every maturity from 2 to 10 years has increase by at least 109 basis points over that timeframe. This presents a potential entry point for investors who have been waiting for yields to increase. For example, an intermediate (3 to 8 years) BBB corporate ladder was yielding 1.16% at the start of 2021; today, it is yielding 2.56%, an increase of 140 basis points. The higher yields you have been waiting for may have arrived.
The municipal market flies under the radar for many investors, but so far this year it has arguably seen the strongest relative value increase in the fixed income space. The short end of the municipal curve has seen the most dramatic moves, highlighted by the 2-year AAA municipal yield, which has increased from 0.22% to 0.87%, nearly quadrupling in yield in just over a month. Intermediate maturities have seen strong increases in both absolute yield as well as relative value (compared to taxable counterparts) as well. The 5-year AAA yield has more than doubled, moving from 0.57% up to 1.20%, while the 10-year yield has added over 40 basis points. As is the case in the corporate market, 2022 has provided an opportunity for municipal bond investors to put money to work at attractive yield levels.
Other notable statistics:
Global Negative Yielding Debt has fallen from $11.31 trillion to $4.88 trillion YTD
The 10-year German Bund yield has risen from -0.19% to 0.23% YTD
In January, municipal bond funds had consecutive weeks of net outflows for the first time since April of 2020
In January, taxable bond funds had three consecutive weeks of net outflows for the first time since April of 2020