Fixed Income Market Commentary

Last Updated: 7/19/2022


Q2 2022

Following the worst quarterly performance in more than forty years in Q1, the fixed income selloff continued through Q2 2022 but the rate of change slowed. As the Federal Reserve continued to battle broad-based inflation over the first half of 2022, Fed Funds Rate hike expectations drove bond yields higher and prices lower. However, in recent weeks, fears of high inflation were accompanied by fears of economic contraction, and the perceived risk of recession actually pulled 10-year Treasury rates lower from a recent closing high of 3.48% on 6/14/22 to 2.97% at quarter-end – all while the Fed eyes another 50-75bps hike!

In the municipal bond market, changes in muni yields have historically shown a correlation to changes in Treasury yields, but many factors influence how close the correlation is. As you can see in the chart below, in Q1 the increase in muni yields significantly outpaced the increase in Treasury yields {Remember, as rates(yields) go up, bond prices go down}. In Q2 however, the selloff in munis was somewhat subdued compared to treasuries, particularly in the short to mid-range maturities.  We believe this outperformance is a signal that munis became oversold in Q1, at least on a relative basis. 

What this chart doesn’t show, is that the majority of this Q2 selloff actually occurred in April, and yields have remained somewhat stable for over two months (adjusting for short-term volatility).  This gives us more confidence that the selloff has stabilized in the near-term. You can see this below:

Looking forward, it is impossible to predict what will happen to markets in the back half of 2022, but continued volatility appears likely.  If you’re looking for a bit of good news concerning municipal bonds, consider this: although the consumer may be feeling the effects of higher inflation, higher prices have been a boon for local governments in the form of increased tax revenue. This is coming at a time when municipalities are in the best fiscal shape in recent memory due to federal pandemic grants provided by the CARES and ARPA acts.

What does this mean for you? Investors with cash on the sidelines are able to lock-in bond yields today that are higher than they’ve been since late 2018.  The relatively attractive yields complimented by strong municipal balance sheets could lead to increased investor interest in the asset class (we’ve seen evidence of this anecdotally). For investors who already own muni bonds, this may be an opportune time for tax-loss harvesting within your current portfolio. Tax-loss harvesting is the practice of selling a position to realize a loss and replacing that position with a similar security. This allows you to offset capital gains in the same year, without significantly changing the structure of your portfolio. This simple process can be a powerful tool to incorporate into your overall tax strategy.

Should you have any questions about the markets, specific opportunities, or your portfolio, we highly encourage you to schedule a meeting with your financial advisor today. 

VP of Special Projects & Advisor

Vice President & Advisor

Any questions, comments, or feedback? reach out to us


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