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Commentary published on January 11, 2023

December 2022 Market Commentary


  • U.S. Treasury Curve: U.S. Treasury yields increased beyond one year, and the Curve remained inverted (See Figure 1).
  • Municipal Market Technicals: December issuance totaled $17.2 billion. Low supply and persistent demand benefited municipal bond performance.
  • Corporate Market Technicals: Investment grade (IG) fixed-rate bond issuance for December was just $6 billion. IG bond funds reported about $2.5 billion of outflows during the month.
  • Securitized Trends: Mortgage-backed securities (MBS) and asset-backed securities (ABS) each delivered positive monthly total and excess returns, based on Bloomberg indexes.

Market Review

The Federal Reserve (Fed) increased the fed funds rate by 50 basis points (bps), bringing it to about 4.5 percent, off the zero lower bound for the rate at the end of 2021. While 50bps was lower than the previous four increases levied during this rate hiking cycle, the Federal Open Market Committee meeting minutes showed the members are projecting no rate cuts in 2023 and a terminal fed funds rate that exceeds 5 percent next year. The projected rate was higher than the September projection of 4.6 percent. One source of persistent upward pressure on inflation has been a tight labor market, as the ratio of jobs to workers remain elevated pressuring wages higher.

Bond market volatility jumped as the FOMC meeting approached in December according by the ICE/Bank of America Merrill Lynch MOVE Index,1 a measure of market expectations for bond volatility (See Figure 2). 

Treasury yields in the 2 and 5-year spots closed 12bps and 26bps higher while 10 and 30-year maturities rose 27bp and 23bps, respectively. The 3-month/10-year Treasury yield curve inversion, historically an indicator of future recessionary conditions, persisted but lessened by 15bps.

For the second consecutive month, a lower-than-expected Consumer Price Index (CPI) inflation reading suggested inflation is trending lower. Fed Chair Powell acknowledged that recent inflation data has been encouraging. He also pointed to inflation that is well above the Fed’s 2 percent target, insisting that reducing the inflation rate remains the top priority.

During December, the Bloomberg (BBG) U.S. Treasury Bond Index2 fell 0.52 percent. The BBG U.S. Aggregate Bond Index3 dropped 0.45 percent. The S&P 500 Index4 fell 5.9 percent.

Municipal Market Review

Municipal bonds outperformed Treasuries. Municipal bond yields in intermediate maturities from 3 to 10 years fell between 5 and 13bps (See Figure 3). The 2-year/10-year (2s/10s) curve flattened 15bps, while the 2s/30s curve was just 1bp flatter. Municipal curve yield inversions such as those in the intermediate term seen at the end of December are uncommon and often short-lived. Municipal/Treasury (M/T) ratios declined (See Figure 4). 

The Bond Buyer reported that municipal bond issuance in December was $17.2 billion, down 33 percent month-over-month and 58 percent year-over-year (Y/Y). For the full year, tax-exempt municipal bond issuance is 11 percent lower and taxable municipal bond issuance is off 56 percent compared to 2021. Lipper data showed municipal bond mutual fund outflows of $6 billion in December. Bloomberg reported investment grade (IG) municipal bond fund outflows for the full year at more than $101 billion.

The BBG Managed Money Short/Intermediate (1-10) Index5 gained 0.56 percent and the BBG 1-10 Year Municipal Bond Blended Index6 added 0.47 percent. Longer-maturity bonds outperformed shorter-maturity issues. BBB-rated bonds lagged higher rated bonds.

Corporate Market Review

IG corporate bond spreads were 3bps tighter, per BBG data, ending December at 130bps. The BBG U.S. Corporate Investment Grade (IG) Index7 declined 0.44 percent on a total return basis, with a positive excess return of 0.20 percent compared with duration-matched Treasuries.

FactSet reported that fewer S&P 500 companies discussed the term recession during their earnings conference calls for the third quarter compared to the second quarter. Based on its review of conference call transcripts, of all the S&P 500 companies that conducted earnings conference calls from September 15 through November 16, 179 cited the term recession during their earnings calls for the third quarter, compared with 242 that cited the term during second quarter earnings calls (June 15 through September 14).

Per BBG, the best-performing sectors were Metals and Mining, Life Insurance, Basic Industry, Gaming, and Home Construction. The worst-performing were Cable Satellite, Restaurants, Pharmaceuticals, Media Entertainment, and Independent Energy.

Corporate bonds in the 1- to -5-year maturity range delivered the strongest, positive returns while long maturities had the largest negative returns. BBB-rated bonds fared the best across the investment grade quality spectrum, while AA rated bonds fared the worst.

December index-eligible IG bond issuance was $6 billion, per BBG, about $106 billion less than the prior month and $55.5 billion less than the same month a year ago. Net issuance was negative for the month after redemptions of $55 billion. Corporate bond mutual funds saw about $2.5 billion in outflows, per Emerging Portfolio Fund Research.

Securitized Market Review

In December, the BBG MBS Index8 return had a negative total return of 44bps and 2bps of positive excess return. The most favorable total returns were among the 3 and 4 percent conventional9 coupon issues. BBG data showed non-agency Commercial MBS (ACMBS) outperforming Agency CMBS on a total and excess return basis.

ABS sector total return performance was positive 66bps, per BBG, and 61bps on an excess return basis. Auto loan ABS outperformed credit card on the basis of total and excess returns.

#320022 (1/11/2023)

[1] The MOVE Index measures U.S. interest rate volatility by tracking the movement in U.S. Treasury yield volatility implied by current prices of one-month over-the-counter options on 2-year, 5-year, 10-year and 30-year Treasuries. Historically, the index rises as concerns grow that interest rates are moving higher.

[2] The Bloomberg U.S. Treasury Bond Index is an unmanaged index of prices of U.S. Treasury bonds with maturities of 1 to 30 years. You cannot invest directly in an index.

[3] The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment-grade, U.S.-dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate and hybrid adjustable-rate mortgage pass-throughs), asset-backed securities, and commercial mortgage-backed securities. You cannot invest directly in an index.

[4] The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. Itis a market-value-weighted index with each stock’s weight in the index proportionate to its market value. You cannot invest directly in an index.

[5] The Bloomberg Municipal Managed Money Short/Intermediate Index measures the performance of the publicly traded municipal bonds that cover the USD-denominated short/intermediate term tax-exempt bond market, including state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. It is rules-based and market-value weighted. You cannot invest directly in an index.

[6] The Bloomberg Municipal 1-10 Year Blend 1-12 Year Index measures the performance of short and intermediate components of the Municipal Bond Index — an unmanaged, market value-weighted index which covers the U.S. investment grade, tax-exempt bond market. You cannot invest directly in an index.

[7] The Bloomberg U.S. Corporate Bond Index is an unmanaged market-value-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more. You cannot invest directly in an index.

[8] The Bloomberg MBS Index tracks agency mortgage-backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual pools into aggregates or generics based on program, coupon, and vintage. You cannot invest directly in an index.

[9] Conventional MBS are issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

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