January Fixed Income Market Update
Highlights from the fixed income markets:
- Solid economic reports in January led investors to think that rate cuts expected as early as March might be deferred. Late in January, the Federal Reserve (Fed) announced it was leaving the Fed Funds rate unchanged for a fourth consecutive meeting.
- Returns were negative across most fixed income categories in January as interest rates rose fractionally. The Bloomberg U.S. Aggregate Index (the Agg) was down -0.27% while outperforming similar-duration Treasuries. Investment grade (IG) corporates and municipal bonds posted losses for the month, while high yield (HY) corporates were flat.
- IG corporate spreads finished the month close to unchanged, with a slight bias tighter. HY, on the other hand, saw spreads widen across all sectors, with the most significant widening coming in the Communications sector.
- The HY default rate improved in January to 3.4%, as the number of high yield issuers to have defaulted in the past 12 months came down.
Read on for more details and analysis.
Market Summary
2024 started off slowly for most fixed income categories. High yield corporates were the top performer with a flat return on the month.
U.S. Treasury Market
Treasury yield changes were mixed in January. The long and short end of yield curve moved higher, while the belly of the curve was relatively stable.
Short Treasury returns were positive, while longer Treasuries—10-years and beyond—posted negative returns.
Broad Investment Grade
The Agg posted a small loss in January while outperforming Treasuries. Long corporates and mortgage-backed securities (MBS) were the main drivers of the losses for the month.
IG corporate credit spreads were essentially flat across the short and intermediate buckets. Long corporate spreads tightened.
IG corporate returns were negative, although all IG ratings categories outperformed Treasuries.
IG corporate spreads were mixed, with every sector but one finishing unchanged to slightly tighter. The only sector to realize wider spreads in the month was Capital Goods (industrial products, defense, etc.)
High Yield
HY corporates were flat overall for the month, with slight positive returns from BBs and Bs offset by a negative return on CCCs. All ratings categories realized wider spreads while outperforming similar-duration Treasuries.
Spreads were wider across the board in HY corporates. Communications made the most significant move wider, while Consumer Cyclical widened by the least.
The number of HY issuers to have defaulted in the past 12 months decreased by 3 in January, bringing the HY default rate down to 3.4% – still low by historical standards.
Municipals & Other
Municipal bond returns were negative in January. Yields moved higher across most rating and maturity categories.
Among the assorted other sectors, preferred stocks and leveraged loans generated a positive return for the month.