Weekly Market Trends

Bond Market Meltdown as Inflation Surges

As hawkish central banks continue to try to temper surging inflation, global bond markets are melting down. With the US Agg seeing its worst drawdown in 36 years, active fixed income strategies may offer an advantage relative to index funds.

Senior Research Strategist

This article was written with contributions from Mariola Tyranska. Mariola is a Research Analyst on the SPDR Americas Research Team.

Fed Funds Rate Forecasted to Reach 4.6% as US Agg Sees Worst Drawdown in Decades

Last week, US stocks fell for the third consecutive week, with Energy being the only sector to post gains. In an ongoing effort to temper inflation, monetary policy is expected to become more restrictive for longer, as the Fed Funds terminal rate is projected to reach 4.6% in 2023.1 Against this backdrop, the US Agg is having its worst drawdown since 1986.2

Inflation Rising, Unemployment Expected to Remain Steady

Topping estimates, the US PCE Price Index rose 0.3% in August and 6.2% year over year.3 Eurozone inflation hit a new record high in September with a preliminary CPI reading of 10%, topping the 9.7% forecast and up from 9.1% in August.4

Meanwhile, inflation-adjusted personal spending in the US modestly increased 0.1% in August, after a 0.1% decline in July.5 The September unemployment rate, due this Friday, is expected to remain at 3.7%.6

UK Government Tax-Cut Plan Triggers Market Meltdown

After the UK government’s tax-cut plan was made public, UK gilt yields climbed to their highest levels since 1998.7 That prompted the Bank of England to intervene in order to calm the market, announcing a temporary purchase of long-dated gilts and a delay in planned sales of debt.8 Following the market meltdown, the UK government quickly reversed its tax-cut plan.

Suspicion Russia May Have Sabotaged Gas Pipeline

Last week, Russian President Vladimir Putin signed a decree to illegally annex four areas of Ukraine, which make up almost a fifth of Ukraine's territory.9 Also, four unexplained leaks were discovered off the coasts of Denmark and Sweden in the Nord Stream 1 and 2, stoking suspicion that Russia may have sabotaged the gas pipeline.10

Crude prices jumped at the start of this week, likely in anticipation of OPEC’s decision to cut production this week.11

In Volatile Bond Market, Consider Active Fixed Income

As markets continue to see-saw, bond market volatility is especially elevated. The ICE BofA MOVE Index hit one of its highest levels since the Global Financial Crisis, putting it on the 99th percentile over the last 5 years.12 In challenging environments like this, active fixed income strategies may offer an advantage, because they can potentially modify their duration profiles and access non-traditional bond sectors in search of additional yield more easily than index funds.

Implementation Idea: SPDR® Loomis Sayles Opportunistic Bond ETF (OBND)

Investors may want to look at the SPDR® Loomis Sayles Opportunistic Bond ETF [OBND]. Subadvised by Loomis Sayles, OBND is an active multi-asset credit strategy that seeks to capture risk premiums in markets it believes offer strong risk-adjusted return potential.

OBND’s broad mandate allows it to access higher-yielding and less rate-sensitive sectors that are not a part of the Agg. Diversification versus the Agg helped OBND to generate excess return of 49 bps YTD13 while earning 90 bps higher yield.14 And, as 95% of its peer group is trading at a loss YTD,15 OBND may be considered a lower-cost16 swap for those seeking tax-loss harvesting opportunities.

Source: Bloomberg Finance, L.P., Period: 09/27/2021 – 09/28/2022. US Agg = Bloomberg US Aggregate Bond Index. Past performance is not a reliable indicator of future performance.

OBND Standard Performance as of September 30, 2022

OBND Standard Performance as of September 30, 2022

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