Mostly Tricks, Very Few Treats, in October

October Fixed Income Market Update

October highlights from the fixed income markets:

  • The closely watched 2s to 10s curve inversion (the excess of the 2 year Treasury yield over the 10 year Treasury yield) narrowed to approximately 15 basis points (bps), the smallest inversion since July 2022. Treasury yields ended the month higher across all but the short end of the curve.
  • The Bloomberg U.S. Aggregate Index (the Agg) returned -1.58% in October, its sixth consecutive monthly loss. This marks the longest monthly losing streak in the Agg’s 47-year history.
  • Spreads widened across every investment grade (IG) and high yield (HY) sector in October. In IG, the most significant moves wider occurred in the Consumer Cyclical sector, while Transportation was the worst-performing sector in HY.
  • The high yield default rate moved slightly higher to 3.4%, the highest rate since August 2021 but below the long-term average of around 4%.

 

Read on for more details and analysis.

Market Summary

Every major fixed income category was down in October. IG corporates were the worst performer for the month. HY corporates are still in the black year-to-date.

U.S. Treasury Market

The Treasury yield curve steepened in October as long rates increased and short rates were flat to slightly down. The 2s-10s curve inversion has shrunk to 15 bps, the smallest inversion since July 2022.

Returns were positive on short Treasuries and T-Bills, and negative further out the curve.

Broad Investment Grade

The Agg was negative for a sixth consecutive month in October, the longest monthly losing streak in the history of the index. All Agg components were negative for the month while underperforming similar-duration Treasuries.

IG spreads widened across all maturity buckets. MBS current coupon spreads tightened slightly.

Every investment grade ratings category posted negative returns and underperformed Treasuries.

Spreads widened across every IG sector in October. The worst-performing sector was Consumer Cyclicals.

High Yield

High yield also experienced wider spreads and negative returns across all ratings categories. Despite the tough month, spreads are tighter year-to-date across all HY ratings categories.

Spreads widened across every HY sector, with the most significant widening coming from the Transportation sector (airlines, car rentals, etc.).

The number of issuers in default stayed the same in October. Nevertheless, the HY default rate rose very slightly due to a decline in the overall number of HY issuers.

Municipals & Other

Short municipals were one of a very few corners of the fixed income market to post positive returns. Muni yields fell in October in the BBB space but rose for nearly all the other ratings/duration categories.

Leveraged loans were essentially flat in October, while emerging market bonds, preferred stocks and convertibles all fell.

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.

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