Weekly Fixed Income Update

Interest rates, inflation, central bank action—all these and more can impact fixed income. Stay on top of the market with our weekly update.

March 21, 2023

Macro update

A group of large banks banded together to provide an injection of $30 billion in liquidity to First Republic Bank. The banks hope it will be enough to ease short-term liquidity pressures for First Republic (Wall Street Journal, 3/20/2023).

Central banks put together a deal for UBS to purchase Credit Suisse in a continued effort to quell investor fears and restore confidence in banks after a run on deposits last week (Wall Street Journal, 3/19/2023). 

Markets last week digested slightly higher core Consumer Price Index data and lower-than-expected Producer Price Index data. Volatility surrounding regional banks overshadowed these economic releases. 

The European Central Bank rose rates by 50 bps last week. 

The Fed is set to meet this week. At the time of this writing, the federal funds futures markets indicate a 70% chance of the Fed increasing overnight interest rates by 0.25% to a new range of 4.75 to 5.00% (Bloomberg, 3/20/2023).

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Municipal bond update

Benchmark AAA yields moved lower last week. Two-, five-, 10-, and 30-year yields dropped by 30 basis points (bps), 24 bps, 13 bps, and six bps, respectively. Year-to-date (YTD) municipal yields are lower: Two-, five-, 10-, and 30-year yields are down by seven bps, 17 bps, 25 bps, and 16 bps (Thomson Reuters, 3/17/2023). 

Municipals returned a positive 0.78% last week, compared with 1.60% for the US Treasury Index. Municipals are up 2.10% YTD (Bloomberg, 3/17/2023).

Municipal mutual funds and ETFs reported about $461 million of outflows for the period ending on March 15 (Lipper, 3/15/2023). 

Five-, 10-, and 15-year A-rated municipal yields were 2.94%, 3.18%, and 3.87%, respectively, as of close on March 17. Taxable-equivalent yields are 4.97%, 5.37%, and 6.54%, respectively, assuming the highest level of federal tax at 40.80% (Refinitiv, 3/17/2023).

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Corporate bond update

US investment-grade corporate yields moved lower across the curve last week. Two-, five-, and 10-year yields were 40 bps, 35 bps, and 19 bps lower, respectively. Corporate yield moves are lower across the curve YTD, with two-, five-, and 10-year yields down 15 bps, 39 bps, and 32 bps, respectively (Bloomberg, 03/17/2023).

The ICE BofA 1–10 Year US Corporate Index returned 0.49% for the week and 1.07% month to date. The index underperformed like-duration Treasuries by 1.23% on an excess-return basis for the week and underperformed by 1.61% month to date (Bloomberg, 03/17/2023).

Investment-grade mutual funds and ETFs experienced outflows of $3.8 billion, a decrease from last week’s inflow of $1.7 billion. Corporate-only funds experienced outflows of $1.6 billion following last week’s inflows of $73 million (JPMorgan, 3/17/2023).

Concern around the banking sector resulted in credit spreads widening by 34 bps last week. Despite this move, sharply lower Treasury rates offset this widening, leading to the index producing a positive 0.49% return for the week. The week ended with two-year A and BBB rated bonds yielding 4.68% and 5.19% while five-year A and BBB rated bonds yielded 4.54% and 5.12% (Bloomberg, 03/17/2023).

Investing in fixed income securities involves risk. All investments are subject to loss. Learn more.

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The views expressed are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss. Prospective investors should consult with a tax or legal advisor before making any investment decision. Please refer to the Disclosure page on our website for important information about investments and risks.

An imbalance in supply and demand in the municipal market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads, and a lack of price transparency in the market. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Longer-term bonds typically are more sensitive to interest-rate changes than shorter-term bonds. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of nonpayment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer’s ability to make principal and interest payments. 

Corporate debt securities are subject to the risk of the issuer’s inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer, and general market liquidity. When interest rates rise, the value of corporate debt securities can be expected to decline. Debt securities with longer maturities tend to be more sensitive to interest rate movements than those with shorter maturities. Company defaults can impact the level of returns generated by corporate debt securities. An unexpected default can reduce income and the capital value of a corporate debt security. Furthermore, market expectations regarding economic conditions and the likely number of corporate defaults may impact the value of corporate debt securities. 

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