January Recap: Cold Temperatures, Hot Returns
January highlights from the fixed income markets:
- Returns were positive across virtually every segment of the fixed income market.
- While T-bill yields rose in anticipation of further Federal Reserve (Fed) rate hikes, yields fell across most of the Treasury yield curve.
- As a result, much of the yield curve remains inverted; for example, 2-year Treasuries yielded 69 basis points (bps) more than 10-year Treasuries at the end of January.
- Corporate bond spreads tightened across every sector in both the investment grade (IG) and high yield (HY) space. In general, financial sector spreads performed well, as did long-duration assets.
- The high yield default rate crept higher. At under 2%, the default rate remains low relative to historical averages.
Market Summary
Returns were positive across most fixed income categories in the first month of 2023.
U.S. Treasury Market
Treasury yields fell in January across most of the curve. Rates on short T-bills rose amid broad expectations of further short-term rate hikes from the Fed.
Treasury returns were positive across the entire curve.
Broad Investment Grade
The U.S. Aggregate Index jumped out to a strong start to 2023 as all sub-sectors posted positive returns. Long-duration assets were generally the top performers.
Spreads tightened across corporate bonds and mortgage-backed securities (MBS).
Returns were strong on corporate bonds both in absolute terms and relative to Treasuries. BBBs were the top-performing ratings segment in IG.
Every investment grade corporate bond sector realized tighter spreads, led by the Financials, Energy, and Communications sub-categories.
High Yield
High yield (HY) corporates gained in absolute and excess (relative to Treasuries) terms. Spreads on CCC bonds tightened by over 100 basis points in a risk-on rebound from a weak 2022 for that rating category.
Spreads tightened for the month on all HY corporate sectors, led by Transportation.
The number of HY issuers to have defaulted in the past 12 months rose by 3, bringing the default rate to its highest level since October 2021. This rate remains low relative to historical averages.
Municipals & Other
Muni bonds enjoyed a positive month, led by the long-duration segment.
Emerging markets, convertibles and preferred stocks also rallied in January.
Learn more about SBH’s Fixed Income Strategies.
This update provides an overview of certain broad-based Fixed Income benchmarks and does not include performance of the Segall Bryant & Hamill Fixed Income styles. Past performance cannot guarantee future results. All investments involve risk, including the possible loss of capital. All opinions expressed in this material are solely the opinions of Segall Bryant & Hamill. You should not treat any opinion expressed as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of the manager’s opinions. The opinions expressed are based upon information the manager considers reliable, but completeness or accuracy is not warranted, and it should not be relied upon as such. Market conditions are subject to change at any time, and no forecast can be guaranteed. Any and all information perceived from this material does not constitute financial, legal, tax or other professional advice and is not intended as a substitute for consultation with a qualified professional. The manager’s statements and opinions are subject to change without notice, and Segall Bryant & Hamill is not under any obligation to update or correct any information provided in this material.
1 Source: Bloomberg.
2 Source: Bank of America Merrill Lynch.
3 Hypothetical yields are calculated as the AA municipal yield divided by (1-tax rate). Actual tax-adjusted yields will depend on individual tax circumstances.
4 Source: Standard & Poor’s.