Fixed Income Market Commentary

Last Updated: 4/19/2022

Q1 2022

Q1 of 2022 has seen quite the shakeup in fixed income markets. The US bond market has just suffered its worst quarter in more than 40 years with the Bloomberg U.S. Aggregate Bond Index returning a negative 6% through the end of March. According to Jim Reid of Deutsche Bank, the 10-year Treasury Note (or historical equivalent) just completed its seventh worst quarter since the U.S. Civil War.
So, what’s causing the near-term weakness in bonds? In an effort to counter inflationary trends, the US Federal Reserve has indicated their plan to hike short-term interest rates throughout 2022 and into 2023, as well as shrink their balance sheet by reversing quantitative easing. As Federal Funds Rate expectations have risen, so too have yields on government, municipal, corporate bonds, mortgage-backed securities, etc. And as yields rise, bond prices typically fall.
In the municipal bond market, changes in muni yields have historically shown a correlation to changes in Treasuries, but many factors can influence how close the correlation is. In Q1 2022, the rise in muni yields has outpaced the rise in Treasuries by approximately 30% on the short end of the yield curve and 80% on the long end.

To demonstrate the effect this is having on muni bonds, take a look at the table below. This shows 3 different muni credits with varying structures. These bonds are trading at values between 12% and 32% below where they were trading 3 months ago.

Though the Q1 selloff may have stung existing bondholders, it offers prospective investors a chance to buy in at lower prices and higher yields than any other time in the past few years. Until recently, unusually high volumes of bonds have been called as issuers refinanced debt at lower rates. Investors whose bonds have been called, or those who have been sitting on the sidelines waiting for more attractive yields may find some interesting opportunities uncovered by recent bond market gyrations.
Should you have any questions about the markets, specific opportunities, or your portfolio, we’d highly encourage you to schedule a meeting with your financial advisor today.

VP of Special Projects & Advisor

Vice President & Advisor

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