- Jonathan Poyer
Looking At the Fixed Income Markets for Signals to Act
Let us graphically take a look at the fixed income market for Q1 2023. Are there any nuggets that we can glean from the quarter to help us think about the rest of 2023?
One take is that the banking issues and broader macro situation is pushing the end of rate increases from the Fed. We tend to anticipate that there will not be any further rates from Q3 and beyond, but that does not mean that we will necessarily see rate decreases. So let's dive in:
2022 was an unheard-of type of year will all markets being down, similar to 1994. This set us up for a great start to the year with January off to the races. However, bank issues really brought things to a halt and February and March have been troublesome. Historically, we would anticipate the AGG having a great year with the average return after a negative year being over 12%.
The High Yield Index has never returned two negative years in a row and on average the annual return after a negative year have been over 27%!
High yield spreads are still fairly high and we have not seen much of a rally here. We are not looking at a broad or deep depression based on credit spreads and we have not seen spreads blow out any worse in 2023 compared to previous years:
Our hypothesis regarding why we have not seen a snapback in fixed income or a quick catch up in general is the result of the amount of money still on the sidelines. Money market fund assets are at 20 year highs with investment grade bond funds accruing $67.5B as of 4/5/2023. Until money comes back into the market, the AGG and High Yield will most likely not normalize.
We are seeing loan to deposit ratios pick up across all U.S. banks. The average ratio for all banks at the end of 2022 was 68.2%; the lowest on record since before 2000. For large banks, the loan-to-deposit ratio was 60.7% and for small banks 80.5%; all records since 2000. Loans are the least liquid of the things that these banks are able to sell. This is causing losses in held to maturity portfolios to grow quite large and thus, a rush to action.
A lot of this type of action will really make the case to the Fed to pause their rate hiking adventures.