Fixed Income Commentary | Parametric Portfolio Associates

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.

September 25, 2023

Macro update

Last week’s economic data centered around the Federal Open Markets Committee (FOMC) meeting, where members voted to keep the overnight lending rate unchanged at 5.25% to 5.50% (Bloomberg, 9/25/2023).

The Fed also released its updated dot plot, which forecasts the overnight rate between now and the end of 2026. The FOMC now believes there will be two interest rate cuts next year. Chair Jerome Powell left the door open for the possibility of an additional interest rate hike this year, although the market currently discounts the likelihood of this occurring (Bloomberg, 9/25/2023).

This week we’ll see the third revision of second-quarter GDP data and personal consumption expenditures (PCE) deflator data. Current expectations for the Core PCE deflator are 0.20% month over month and 3.9% year over year (Bloomberg, 9/25/2023).

September 7, 2023

Fixed income portfolio manager Kevin Lynyak explains why investors should be extending duration while yields are at unprecedented highs. Listen now:

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September 15, 2023

Managing director John Dillon shares what he expects from the current municipal bond market. Listen now:

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Municipal bond update

Benchmark AAA muni yields rose sharply across the curve last week, led by the very front end. The two-year yield rose by a striking 24 basis points (bps), while the five-, 10-, and 30-year yields rose 19, 16, and 13 bps, respectively. Year-to-date (YTD) tax-exempt yields are now sharply higher, with five-, 10-, and 30-year AAA yields up by 60, 52, and 50 bps, respectively (Refinitiv MMD, 9/22/2023).

The Bloomberg Municipal Bond Index lost 1.08% on the week, bringing YTD performance to just 0.15%. The Bloomberg US Treasury Index declined by 0.50% to -0.89% YTD (Bloomberg, 9/22/2023).

Municipal mutual funds reported outflows of approximately $636 million for the period, taking the YTD outflow total higher to approximately $10.8 billion (Refinitiv Lipper, 9/21/2023).

Five-, 10-, and 15-year A-rated municipal yields were 3.32%, 3.50%, and 4.16%, respectively, as of close on September 22. Related taxable-equivalent yields were 5.61%, 5.91%, and 7.03%, respectively, assuming the highest level of federal tax at 40.8% (Refinitiv MMD and Parametric, 9/22/2023).

Corporate bond update

US investment-grade (IG) corporate yields rose across the curve last week. Two-, five-, and 10-year yields rose eight, seven, and eight bps, respectively. Corporate yields are higher across the curve YTD, with two-, five-, and 10-year yields up 65, 34, and 39 bps, respectively (Bloomberg, 9/22/2023).

The ICE BofA 1–10 Year US Corporate Index returned -0.20% for the week and -0.85% month to date. The index performed outperformed like-duration Treasuries on an excess-return basis by 0.08% for the week and by 0.06% month-to-date (Bloomberg, 9/22/2023).

IG mutual funds and ETFs experienced inflows of $1 billion, a decrease from last week’s inflows of $1.9 billion. Corporate-only funds experienced inflows of $638 million following last week’s inflows of $916 million (JPMorgan, 9/22/2023).

Corporate one- to 10-year IG bond yields have risen 49 bps YTD and ended last week at 5.9%. (Bloomberg, 9/22/2023).

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SOLUTION

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INSIGHT

Corporate Bond Market Insight

Each month we recap the corporate bond market’s performance, delving into the numbers and offering forward-looking commentary. Click below for the latest edition.

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INSIGHT

Municipal Bond Market Insight

Each month we recap the muni bond market’s performance, delving into the numbers and offering forward-looking commentary. Check out the latest edition.

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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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