Market Updates March 11, 2022
The Russian invasion of Ukraine sent shockwaves throughout capital markets as investors weighed the ramifications of a major geopolitical conflict. The West responded with severe economic sanctions for Russia essentially cutting the nation off from the global financial system. The ripple effects resulted in increasing volatility across equities, fixed income and commodities. The Bloomberg Barclays U.S. Aggregate Bond Index fell -1.1% in February extending its losses for the year. The year-to-date return of -3.3% is the worst two month start for the index in a calendar year since 1980.
The latest headline CPI report was released in early February and the 7.5% year-over-year change was the highest level since March 1982. Following the hottest print in decades, the probability of a 50 bps rate hike in March surpassed 90% as investors anticipated a very hawkish policy response from the Fed aimed at tampering inflation. However, markets are now pricing in only one 25 bps increase at the next FOMC meeting while markets forecast a 60% probability of three rate hikes by June. This shift has been driven by the added uncertainty around the global economic outlook as sanctions against Russia and surging energy prices threaten economic growth. Fed officials have continued to reiterate that monetary policy measures will be dictated by the path of inflationary trends.
The recent economic and geopolitical events have resulted in a continued increase in bond market volatility as measured by the MOVE Index. Market participants witnessed the 10-year Treasury yield to maturity eclipsing 2.0% before settling at 1.8% by the end of February. Even more pronounced has been the move in shorter maturity yields as the recent surge has bond markets pricing in expected monetary policy actions. On a rolling three-month basis, fixed income investors have seen the yield on the 2-year Treasury rise 91 bps - the largest such move since June 2008 amid the Great Financial Crisis. These shifts have concluded in flattening along the U.S. Treasury yield curve as the 10 – 2-year spread stands at 39 bps to close the month. When viewing the 10-year on a real basis, investors have seen the real yield deteriorate as of late. As an energy supply shock further contributes to inflation at a four-decade high, real yields for fixed income could be driven lower as bond investors search for positive levels of real income.
Notes & Disclosures
Index Returns – all shown in US dollars
All returns shown trailing 2/28/2022 for the period indicated. “YTD” refers to the total return as of prior-year end, while the other returns are annualized. 3-month and annualized returns are shown for:
- The Barclay’s US Aggregate Index, a broad-based unmanaged bond index that is generally considered to be representative of the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
- The ICE BofAML Emerging Markets Sovereign Bond Index is a subset of The BofA Merrill Lynch World Sovereign Bond Index excluding all securities with a country of risk that is a member of the FX G10, all Western European countries, and territories of the U.S. and Western European countries. The FX G10 includes all Euro members, the U.S., Japan, the U.K., Canada, Australia, New Zealand, Switzerland, Norway, and Sweden.
- The Bloomberg Barclays Global Aggregate Index, which measures global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.
- The S&P Global Developed Sovereign Bond index includes local-currency denominated debt publicly issued by governments in their domestic markets.
- S&P Eurozone Developed Sovereign Bond - seeks to measure the performance of Eurozone government bonds.
- The S&P Pan-Europe Developed Sovereign Bond Index is a comprehensive, market-value-weighted index designed to track the performance of local currency-denominated securities publicly issued by Denmark, Norway, Sweden, Switzerland, the U.K. and developed countries in the Eurozone for their domestic markets.
- ICE BofAML Emerging Markets Sovereign Bond - tracks the performance of US dollar (USD) and Euro denominated emerging markets non-sovereign debt publicly issued within the major domestic and Eurobond markets.
- The Bloomberg Barclay’s US Corporate Bond Index (AA), which measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
- The Bloomberg Barclay’s US Corporate High Yield Index, which covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
- Bloomberg Barclay’s Global Aggregate Securitized- US Mortgage-Backed Securities, which is a component of the Bloomberg Barclay’s US Aggregate Index and measures investment grade mortgage backed pass-through securities of GNMA, FNMA, and FHLMC.
- Bloomberg Barclay’s Global Aggregate Securitized- US Asset-Backed Securities, which is a component of the Bloomberg Barclay’s US Aggregate Index and includes the pass-throughs, bullets, and controlled amortization structures of only the senior class of ABS issues.
- The Blomberg Barclay’s US Floating Rate Notes (<5 Yr) Index, measures the performance of U.S dollar-dominated, investment grade floating rate notes with maturities less than 5 years.
- The Bloomberg Barclay’s Municipal Bond Index, which measures investment grade, tax-exempt bonds with a maturity of at least one year.
- The S&P/ LSTA Leveraged Loan Index is designed to reflect the performance of the largest facilities in the leveraged loan market.
An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Index performance used throughout is intended to illustrate historical market trends and performance. Indexes are managed and do not incur investment management fees. An investor is unable to invest in an index. Their performance does not reflect the expenses associated with the management of an actual portfolio. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All investing involves risk including loss of principal. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Past performance is no guarantee of future results.
Key Rates are shown for US Treasuries and London Interbank Offered Rate (LIBOR), the interest rate at which banks offer to lend funds (wholesale money) to one another in the international interbank market. LIBORis a key benchmark rate that reflects how much it costs banks to borrow from each other. “Current” refers to the percentage rate as of 6/30/2018, while the rates of change are stated in basis points.
Credit Spreads shown comprise the Option-Adjusted Spread of the indices indicated, versus the US 10-Year Treasury Yield. “Current” refers to the spread as of 6/30/2018, while the rates of change are stated in basis points.
Key Indicators correspond to various macro-economic and rate-related data points that we consider impactful to fixed income markets.
- 2s10s (bps)/ 10 Yr vs 2 Yr Treasury Spread, which measures the difference between yields on 10-Year Treasury Constant Maturity Securities and 2-Year Treasury Constant Maturity Securities.
- West Texas Intermediate, which is an oil benchmark and the underlying asset in the New York Mercantile Exchange’s oil futures contract.
- Core Consumer Price Index, which measures the consumer price index excluding food and energy prices. Shown as of the prior month-end.
- Breakeven Inflation: 5 Yr %/ bps, which uses a moving 30-day average of the 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation–Indexed Constant Maturity Securities to derive expected inflation.
- Breakeven Inflation: 10 Yr %/ bps, which uses a moving 30-day average of the 10-Year Treasury Constant Maturity Securities and 10-Year Treasury Inflation–Indexed Constant Maturity Securities to derive expected inflation.
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Now, diving into the provided article from March 11, 2022:
Russian Invasion of Ukraine and Market Impact:
- The Russian invasion of Ukraine caused significant shockwaves in capital markets, leading to increased volatility across equities, fixed income, and commodities.
- The West responded with severe economic sanctions, effectively isolating Russia from the global financial system.
Economic Sanctions and Bond Market Volatility:
- Economic sanctions against Russia contributed to a continued increase in bond market volatility, as measured by the MOVE Index.
- The Bloomberg Barclays U.S. Aggregate Bond Index fell -1.1% in February, marking its worst two-month start since 1980.
Inflation and Monetary Policy:
- The latest headline CPI report, with a 7.5% year-over-year change, was the highest level since March 1982.
- Expectations of a 50 bps rate hike in March surpassed 90%, driven by the anticipation of a hawkish policy response from the Federal Reserve to address inflation.
- However, markets shifted to pricing in only one 25 bps increase at the next FOMC meeting, with a 60% probability of three rate hikes by June.
- The Fed emphasizes that monetary policy measures will be guided by the path of inflationary trends.
Yield Curve Movement and Real Yields:
- Bond market volatility led to shifts in yields, with the 10-year Treasury yield exceeding 2.0% before settling at 1.8% by the end of February.
- Shorter maturity yields saw a substantial increase, with the yield on the 2-year Treasury rising 91 bps on a rolling three-month basis.
- The U.S. Treasury yield curve flattened, with the 10 – 2-year spread standing at 39 bps.
Energy Supply Shock and Real Yields:
- An energy supply shock, coupled with surging energy prices, contributed to inflation at a four-decade high.
- Real yields for fixed income could be driven lower as bond investors seek positive levels of real income.
Index Returns and Performance Metrics:
- Various bond indices, such as the Barclays U.S. Aggregate Index, ICE BofAML Emerging Markets Sovereign Bond Index, and S&P Global Developed Sovereign Bond Index, are mentioned to illustrate market trends and performance.
- Performance metrics, including year-to-date returns and 3-month returns, are highlighted for these indices.
Key Rates, Credit Spreads, and Indicators:
- Key rates for U.S. Treasuries and LIBOR are shown, reflecting changes in basis points.
- Credit spreads, indicated by Option-Adjusted Spread, are presented against the U.S. 10-Year Treasury Yield.
- Key indicators like 2s10s (bps), West Texas Intermediate (oil benchmark), Core Consumer Price Index, and Breakeven Inflation (5 Yr and 10 Yr) are included.
- The article concludes with general disclosures from Wilbanks, Smith & Thomas Asset Management (WST), highlighting that the information presented is for informational purposes only and advising consultation with professionals before making investment decisions.
This comprehensive overview provides a nuanced understanding of the financial landscape during the specified period, covering geopolitical events, market reactions, inflation dynamics, and key performance indicators across various indices.