➢ Wednesday’s Federal Reserve “Fed” meeting drove up volatility, as markets first rallied when the Federal Open Market Committee statement was released, containing a passage about the Fed “taking into account cumulative tightening” as a sign that the Fed could start winding down its hiking campaign, but then fell 30 minutes later during Chairman Powell’s press conference.
➢ Powell’s comments that “the ultimate level of interest rates will be higher than expected” and that the Fed “still has some ways to go” in its policy cycle drove stocks sharply lower and the yield curve higher yet again, with the 2-year point on the curve (which is closely aligned with Fed rate expectations) rising the greatest. (Chart 1)
➢ The “Peak” Fed rate in this cycle has now risen to nearly 5.3%, with the market pricing in further 5 rate hikes (totaling +125 bps) through mid-2023. (Charts 2 and 3). The hawkish commentary led to an equity rout, with the S&P 500 down over 3% for the week, and a general risk-off tone in the credit markets, with spreads wider across the board, from Investment Grade, to Emerging Markets and High Yield.
➢ Friday’s Job’s report for October provided a mixed outlook: while total job gains were above expectations at +216,000, there were less optimistic figures in a higher unemployment rate (3.7%) and labor force participation fell. Equities recovered slightly but bonds continued to fall, not surprising as this only helps to reinforce need for aggressive Fed rate action.
➢ For the week, Emerging Market debt with lower duration (<10yrs) eked out a positive return, while other asset classes were down. (Chart 4)
➢ High Yield returned -1.4% for the week, with performance across the three rating categories all around this same level. Over the last three months, however, single-B rated bonds have been down the least at -4.8%, versus -5.5% for BB’s and -6.0 % for CCCs.
➢ High Yield Financials led for the week, down just -0.9%, while Telecom Media & Technology “TMT” was down the most at -2.0%. For the past three months, Energy was down the least at -2.5%, followed by Industrials at -4.2%, while Healthcare lagged, down -8.4% for the 3-month period.
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There are risks associated with investing, including possible loss of principal. Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner, or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Investing in mortgage- and asset backed securities involves interest rate, credit, valuation, extension and liquidity risks and the risk that payments on the underlying assets are delayed, prepaid, subordinated or defaulted on.
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