Graphic: Battered fixed income set for rebound
With inflationary pressures moderating and many observers expecting the Federal Reserve to continue slowing the pace of interest rate hikes, investors’ attention has turned to a potential U.S. recession. Economists have increasingly called for a downturn, placing the odds of one occurring over the next year at 65% compared with 15% a year ago, according to the median forecast collected by Bloomberg LP. Despite that, after a tough year for fixed income across the board, 2023 could be an opportunity to lock in relatively high yields.
Lower Treasury yields: Since the start of 2023, longer-term Treasury yields have fallen. The two-year yield declined 30 basis points to 4.11% as of Jan. 25, and the 10-year yield dropped by 42 basis points to 3.46%. The movement comes after yields across the board spiked last year.
U.S. Treasury yield curves
Good start: After a difficult 2022, fixed-income assets have rebounded nicely this year. Corporate investment grade bonds have led the way, returning 3.97% through Jan. 25. Mortgage-backed securities, emerging market bonds and high-yield corporate bonds have also made nice gains since the start of 2023, returning 3.77%, 3.70%, and 3.66%, respectively.
Fixed-income index returns*
Locking in yields: Corporate investment-grade bonds are yielding 4.96%. Although 96 basis points lower than the end of October, that’s still higher than corporate high-yield bonds’ 4.21% yield at the end of 2021. Corporate high-yield securities’ yield-to-worst is currently 8.16%. While investment-grade and high-yield securities have relatively high yields compared with the past several years, spreads over Treasuries have typically been wider during periods of economic stress. For instance, investment-grade spreads were over 270 basis points at the end of March 2020.
Corporate bond yields and spreads
Institutional outflows: Fixed-income separate account composites have seen outflows for five straight quarters through Sept. 30. There were $84.3 billion of outflows in the third quarter, with BBB-rated companies and high-yield bonds leading the way with outflows of $10.9 billion and $10.2 billion, respectively. Emerging markets, core-plus and multisector strategies also had significant outflows.
Quarterly separate account flows (billions)
*As of Dec. 31, 2022 (except year-to-date). Sources: U.S. Department of the Treasury, Bloomberg LP, Morningstar Inc.
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