At the beginning of January, Treasury futures reflected the market’s expectation that the Federal Reserve (Fed) would enact three quarter-point cuts in short-term interest rates by the Fed’s meeting in June, and two to three more cuts by the end of 2024. Strong economic results throughout the quarter, however, including a resilient labor market and inflation readings that remain well above the Fed’s 2% target, caused Fed officials and investors to reevaluate. By the end of March, odds of even a single rate cut by June had dropped to roughly coin-flip odds, with less than three cuts expected by the end of the year. In response, Treasury yields rose across the curve, and Treasuries lost approximately 1%. The Bloomberg U.S. Aggregate Bond Index (the Agg) produced a -0.78% loss in the quarter.

Although Treasury yields rose, credit spreads continued to tighten, mitigating the negative returns. In the investment grade (IG) corporate space, spreads tightened across all but one sector (Capital Goods). This allowed IG corporates to produce an overall loss of -0.40%, less than that of similar duration Treasuries. BBBs outperformed Treasuries by over 100 basis points (bps) while also outperforming bonds rated A to AAA in absolute terms. High yield (HY) corporates followed a similar pattern, as CCCs beat the return on similar-duration Treasuries by over 200 bps while also leading BBs and Bs in absolute returns. HY spreads tightened by 20 to 50 bps in every sector but one (Communications). This spread activity, combined with higher carry/yield versus IG corporates, led HY to a +1.47% return in the quarter.

Read on for additional data and details impacting fixed income markets in the first quarter of 2024.

Most fixed income categories generated negative returns in the quarter. High yield corporates were an exception.

Treasury yields rose across the curve, with a slightly larger increase coming in the 2- to 5-year segment.

Quarterly returns were positive for short Treasuries and increasingly negative further out on the curve.

The Agg produced a negative absolute return in the quarter, although it outperformed similar-duration Treasuries. Performance was mixed among the Agg sub-components. Asset-backed securities had the strongest absolute returns, while long corporate bonds had the weakest.

Spreads on investment grade corporates tightened in the quarter while MBS current coupon spreads widened slightly.

Investment grade (IG) returns for all ratings categories were negative in absolute terms but positive in excess terms. Returns were relatively better on lower-rated IG categories.

Spreads tightened in the quarter for all IG sectors other than Capital Goods. The top-performing sector was Financials.

High yield returns were positive in both absolute and excess terms. Returns were skewed toward the riskier categories, led by CCCs. Spreads tightened across all ratings categories, led once again by CCCs.

Spreads tightened across every HY sector aside from Communications. Spreads in the Utilities sector tightened the most and finished the quarter as the tightest HY sector.

After falling in January, the HY default rate trended higher in February and March, finishing the quarter higher than where it began.

Municipal bonds posted negative returns for the quarter. Yields rose in nearly every ratings and maturity category, with 5- and 10-year BBBs being the only exceptions.

Returns were generally strong in the various sectors we include in the “other” category. Global Treasuries were the lone exception.