April Doesn’t Break Bearish Trend In Fixed Income

Top-Level Takeaways

• The first quarter was historically bad for fixed income, and April did nothing to break the bearish trend.

• Recent economic data supports the narrative of an overheated labor market and inflation risks.

• There are plenty of potential obstacles for future economic growth, including global catalysts (Russia/Ukraine and China slowdown) and tighter monetary policy in the United States and abroad.

Last month, we highlighted the fact the first quarter was the worst for broad fixed income in 42 years.

April was not the start of a rebound.

The ICE BofA US Broad Market Index slid another 3.67%, bringing the YTD return to -9.50%. Since the index began in January 1976, the second-worst start of a calendar year through April was 1994 at -3.57%, nearly 6 points better than the current year.

Uncertainty related to the path of inflation and the consequential Fed response continues to be the most significant driver of volatility in the bond market, and the fed funds futures market is now priced for four 50-basis-point rate hikes at the next four FOMC meetings. This would get the funds rate back to the Fed’s current neutral policy rate by September, and any hikes after that would take policy into restrictive territory.

To be clear, the actual neutral policy rate is never known with certainty in real time, and if you polled a group of economists on what the neutral rate is, you would likely see a wide range of opinions. Nevertheless, this aggressive steepening of the forward path of short-term rates has had its impact on the full-term structure of interest rates, and fixed income spreads resumed the 2022 widening trend in April after a brief pause in the second half of March.

This market commentary is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Visit trustcu.com to read about the latest economic data and overall market trends.