December 2020: Fixed Income Markets Review
2020 was a rollercoaster ride for market participants as COVID-19 angst reverberated throughout equity and fixed income markets. While fixed income assets were not spared from market volatility earlier in the year, major fixed income sectors finished off 2020 with positive returns.
Fixed income assets started the year positive but began to reverse course in late February as market participants came to the realization that COVID-19 was worse than originally expected. As the virus continued to rapidly spread across the globe and shut economies down in March, volatility throughout fixed income markets skyrocketed. Liquidity across bond markets evaporated, with even U.S. Treasuries and Agency MBS experiencing major price dislocation. As investors rushed for risk-off assets, the yield on the ten-year U.S. Treasury fell to 0.54%, its lowest point in history up until that time. Due to the lack of liquidity in the market, the ten-year yield rallied to 1.19% within nine days, before falling back to 0.59% less than thirty days later. Credit spreads also increased significantly versus their closing values at the end of 2019, with investment grade and high yield spreads widening 280 bps and 764 bps, respectively. In order to restore proper market functioning and calm investors, the Federal Reserve cut rates by 150 bps between March 2nd and March 17th. In addition to rate cuts, the Fed restarted their quantitative easing program and opened numerous credit facilities to support corporate, municipal, and asset-backed securities liquidity.
After one of the most volatile months on record, fixed income assets began to recover, as credit spreads on investment grade and high yield retraced much of their widening. While fears of COVID-19 lingered throughout the rest of the year, market participants began to focus on the upcoming presidential election in the U.S. With both candidates promising large stimulus packages to help jumpstart the U.S. economy, inflation breakevens began to move higher. Furthermore, the Fed stated they will let inflation run above their 2% target for a sustained period.
As a result, between the end of the second quarter and election day, the U.S. ten-year breakeven increased by approximately 40 bps. Following the election of Joe Biden and the approval of multiple COVID-19 vaccines, market participants continued to recalibrate their expectations for long-term growth and inflation as the year came to an end. As of December 31st, ten-year inflation expectations were just under 2%, a level last seen in April 2019. With investors expecting the Fed to be on hold for at least the next three years and the potential for additional fiscal stimulus packages, growth and inflation expectations may continue to trend upward.
Important Notes & Disclosures
Index Returns – all shown in US dollars
All returns shown trailing 12/31/2020 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 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. LIBOR is a key benchmark rate that reflects how much it costs banks to borrow from each other. “Current” refers to the percentage rate as of 6/30/2018, while the rates of change are stated in basis points.
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 6/30/2018, while the rates of change are stated in basis points.
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.
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