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.