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 bear flattener continues. While the US Federal Reserve begins to prepare to shift from a rate of change shock to tighten financial conditions to a level and duration strategy to keep financial conditions tight, the US Treasury yield curve has witnessed a massive flattening.

Short-term interest rates have moved aggressively higher after a strong push from Fed Chair Jerome Powell’s brief but forceful Jackson Hole speech and a disappointing upside inflation surprise for August CPI (Consumer Price Index) data. Markets continue to oscillate between inflation fears and growth scares. As the Fed continues to tighten, we can expect those growth fears to grow further – keeping long-term rates capped as growth moderates and recession concerns build. Overall, we can expect a flat and inverted yield curve to stay for the foreseeable future.

Flatter for Longer
US Treasury Yield Curve
Source: Natixis IM Solutions, Factset. As of 9/8/17 to 8/31/22.

The investment grade corporate yield curve offers a much more normal-looking upward sloping curve. This sector is offering investors incremental carry as they move out through the intermediate portion of the curve. In addition, spreads have widened out to about one standard deviation cheap to their 5-year average. This can be seen as offering an attractive entry point with room for spread compression to offset upward yield moves.

Value in Investment Grade Credit
Investment Grade Corporates Valuations Source: Natixis IM Solutions, Factset. Data shown from 9/8/17 to 8/31/22.

Skeptics may point out that spreads should widen further as Fed tightening takes a bite on economic growth. However, corporate balance sheets remain robust and earnings are likely to stay buoyed as nominal growth remains above trend. Also, consumers are sitting on strong balance sheets, which should continue fueling consumption. So, while investors remain fearful of a continued backup in yield, investment grade credit may offer a compelling vehicle by which to begin extending duration in portfolios.

Resource

Fixed Income Dashboard – Q3 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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This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Natixis Investment Managers, or any of its affiliates. The views and opinions expressed are as of September 2022, and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

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