In a challenging period for fixed income assets, the Fixed Income Dashboard lays out relevant data to illustrate key developments for the asset class.
The Fed may still be early in its hiking cycle when looking at policy rates, but all the magic has transpired with respect to financial conditions, thanks to strong forward guidance. Long and variable lags no more – the market adjusts to expectations of future policy and this market has certainly done much of the Fed’s heavy lifting tightening financial conditions, pushing yields and mortgage rates higher. In essence, markets have fully priced in the hiking cycle and likely a little extra. The hard work has been done. Now it all comes down to follow-through, and should those inflation green shoots emerge more forcefully, markets have likely over-extrapolated hikes into the future.
Chicago Fed National Financial Conditions Index Source: Natixis IM Solutions, FactSet, Bank of America Merrill Lynch. Chicago Fed NFCI data shown from 12/31/93 to 6/3/22.
The pain of the sea of red in fixed income during 2022 has presented increasingly compelling opportunities for returns in the quarters ahead. Yields are generally a good predictor for forward returns, and despite the pain to date, US credit, both high yield and investment grade, now offers meaningful nominal and real carry. Set that against a backdrop of a fully priced hiking cycle, strong corporate balance sheets, robust consumer balance sheets to continue fueling consumption, and growth moderating to still above-trend levels, and the outlook for credit remains quite sanguine.
Yields Reveal Optimism for Credit
Fixed Income Yields Source: Natixis IM Solutions, FactSet. Real Yield represents nominal yield deflated by 5Y5Y forward inflation rate. As of 5/31/22.
Fixed Income Dashboard – Q2 2022
This in-depth chart deck highlights historical data related to:
• Asset class valuations
• Relative valuations
• Credit conditions
• Distress ratios and defaults
• Inflation trends
• Yield curve
• Treasury yields
• Asset flows
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