Fixed Income Market Commentary - Q3 2024

Overview

• The fixed income market experienced a rally in the third quarter of 2024, primarily driven by the Federal Reserve’s (Fed) cut in interest rate policy and indications of slower U.S. inflation and employment growth.
• Higher-yielding and longer-duration sectors led the market as confidence grew in the Fed's ability to support the U.S. economy while controlling inflation.
• Emerging market and U.S. high yield bonds are the leading sectors in fixed income year-to-date, while U.S. Aggregate and U.S. Treasuries lagged, posting negative returns for most of the year.
• At their September meeting, the Fed cut the benchmark policy interest rate by 0.50%,?publicly commenting on slowing job gains and progress toward its inflation goals. In its updated quarterly forecast, the Fed lowered its outlook for inflation and interest rate policy for the next several years.

Insights:

Now that the Federal Reserve has begun cutting rates in the context of a still-resilient U.S. economy, we recommend that investors:

• Move out to the intermediate range of the U.S. Treasury curve
• Prioritize income with intermediate maturity BBB corporates
• Tap into opportunities in U.S. high yield with CCC index exposure

*Tax equivalent yield

Sources for charts, table and overview data: ICE Data Services, JP Morgan, Bloomberg | Data as of 9/30/2024

Access the full report here.

Glossary and Index Definitions?

• The Bloomberg U.S. Aggregate Index is a broad-based flagship benchmark that measures the investment grade, US-dollar-denominated, fixed-rate taxable bond market.
• The Bloomberg U.S. Corporate Bond Index 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 U.S. Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. ?Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index. STRIPS are excluded from the index because their inclusion would result in double-counting.
• The Bloomberg U.S. Municipal 1-10 Year Index measures the performance of USD-denominated, tax-exempt bonds with maturities of 1-10 years, including state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.
• The ICE BofA US Cash Pay High Yield Constrained Index contains all securities in The ICE BofA US Cash Pay High Yield Index but caps issuer exposure at 2%.
• The J.P. Morgan 1-10 Year Emerging Markets Sovereign Index tracks liquid, U.S. dollar emerging market fixed and floating-rate debt instruments issued by sovereign and quasi sovereign entities. The EMBIGDL 1-10 Index is based on the long-established J.P. Morgan EMBI Global Diversified Index and follows it methodology closely, but only includes securities with at least $1 billion in face amount outstanding and average life below 10 years.
• Option Adjusted Spread (OAS): For a bond, OAS is the measurement of the spread between the bond and the underlying government yield curve. For an Index, the average of its constituent security government option-adjusted spreads, weighted by full market value.
• Tax Equivalent Yield: The yield that a taxable bond would need to equal the yield on a comparable tax-exempt municipal bond, taking into account the impact of taxes. The calculation is a tool that investors can use to fairly compare the yield between a tax-free investment and a taxable alternative. TEY assumes the highest marginal Federal tax rate, is measured at the individual bond level, and aggregated to the portfolio level. Tax Equivalent Yield = Tax Free Municipal Bond Yield / (1-Tax Rate).
• Yield is the annual rate of return on a bond. It has a reverse relationship with price such that as bond prices rise, yields fall.