Global Bond Market Performance in 2023

The year 2023 will go down as one of the most traumatic and destructive bond markets on record, for the extreme moves, the money lost, the bank collapses as a result and the glaring statement it made. The statement that many Banks, Treasuries, Politicians and Central Banks have no idea what they are doing with regards to risk and money management and influence. We came from 2022, a year of slowly rising rates at year end with ZIRP in effect for the past few years in many countries, before and after the COVID pandemic.

From there inflation took hold for many reasons from easy money to COVID lockdowns to global wars. Interest took off, destroyed many financially and then fell sharply in the last quarter of the year. A reminder interest rates are indicative of credit worthiness and the supply and demand of credit.

Hungry Bond Traders

We saw at the end of 2022 Central Banks becoming more worried about the inflationary effects of too much easy money. The annual global bond performance tells us how all those factors affected fixed interest in the past year and should be read relative to currency performance for global balancing.

The longer rates stay elevated the risk of a downturn increases, with that in mind bond markets and then the Fed began to pivot towards lower rates in October. This is telling at the margin with signs of consumer stress as higher borrowing costs and weaker hiring start to eat into household spending. With the Fed seen being close to its policy rate peak, next up was focusing on growth softening.

Yield Watch (last week of 2023)

Friday/December/Year

  • 2-yr: -4 bps to 4.25% (-45 bps in December; -17 bps in 2023)
  • 3-yr: -2 bps to 4.01% (-46 bps in December; -23 bps in 2023)
  • 5-yr: UNCH at 3.85% (-45 bps in December; -15 bps in 2023)
  • 10-yr: +3 bps to 3.88% (-47 bps in December; UNCH in 2023)
  • 30-yr: +4 bps to 4.03% (-48 bps in December; +5 bps in 2023)

Key Rates and Spreads

Rates

  • 10-year Treasury bonds 3.87%, down -0.03% (3.30-4.99) (new 15 year high 10/20/23 w/e)
  • Credit spread 1.59%, down -0.04% w/w (1.54-2.42) (new 1 year low 12/7/23 w/e)
  • BAA corporate bond index 5.46%, down -0.07% w/w (1-yr range: 5.28-6.80) (14 year+ high w/w 10/20/23)
  • 30-Year conventional mortgage rate 6.67%, down -0.01% w/w (6 month low). (6.07-8.03) (new 23 year high 10/20/23 w/e)

Yield Curve

  • 10-year minus 2-year: -0.38%, up +0.02% w/w (1-yr range: (-1.07 – -0.17) (new 40 year low)
  • 10-year minus 3-month: -1.48%, unchanged w/w (1-yr range: -1.89 – 0.21)
  • 2-year minus Fed funds: -0.98%, up +0.02% w/w

Global Bonds 2023 Performance

The narrative of “higher-for-longer” dominated through much of 2023, driving rates to levels not seen since 2007. Though if you were to just look at the first and last days of 2023 you would think nothing happened. Treasury yields finished the year very close to their final levels from 2022 with the 10-yr yield surrendering a tiny 0.2 bps for the year, but that masked all the rate-related speculation that went on leading up to this point. Over the year the 10-yr yield tested 5.000% in late October, from that ‘panic peak’ a strong rally over the next ten weeks drove the benchmark yield to unchanged for the year as the market began pricing in the likelihood of multiple rate cuts in 2024.

Major Benchmark 10-year Bond markets

U.S. Treasuries finished 2023 on a mixed note with longer tenors showing relative weakness while the short end underperformed into the impending three-day weekend. The market slid from highs to lows after the daily utilization of the Fed’s reverse repurchase facility jumped back above the $1 trillion mark, reflecting some pressure on liquidity, though largely moderated during the final hour.

Key Catalysts that empowered this year’s Treasury sell off

Understandably, aware of past Fed behavior markets are conditioned for loose conditions. They expect Fed loosening measures to reverse any meaningful tightening, hence constant flipping between end of inflation and hawkish Fed speaks trades.

US Treasuries are on course for a record year of inflows as investors chasing some of the highest yields in months pile into cash and bonds, according to Bank of America… Cash funds attracted $20.5 billion and investors poured $6.9 billion into bonds in the week through August 9… Meanwhile, US stocks had their first outflow in three weeks at $1.6 billion. Flows into Treasuries have reached $127 billion this year, set for an annualized record of $206 billion, BofA said.” August 11 – Bloomberg (Farah Elbahrawy and Greg Ritchie)

“Losses on longer-dated Treasuries are beginning to rival some of the most notorious market meltdowns in US history. Bonds maturing in 10 years or more have slumped 46% since peaking in March 2020… That’s just shy of the 49% plunge in US stocks in the aftermath of the dot-com bust at the turn of the century. The rout in 30-year bonds has been even worse, tumbling 53%, nearing the 57% slump in equities during the depths of the financial crisis.” October 4 – Bloomberg (Ye Xie)

Surging market yields are a serious issue for a banking system loaded with long duration securities portfolios. This may well be a push over the cliff for troubled commercial real estate (CRE). Leveraged lending and leveraged finance gets more costly. Simply there are trillions of floating rate loans among individuals, speculators, businesses, and nations.


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Sources: Scotia Bank, TC, FT

Note these charts, opinions, news, estimates and times are subject to change and for indication only. Trade and invest at your own risk.

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