Weekly Fixed Income Update | Lord Abbett
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WEEKLY FIXED INCOME UPDATE

For the week of July 26, 2021

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CHART OF THE WEEK: The Federal Reserve’s Dot Plot and Forward Rates

THE WEEK IN REVIEW

Equity markets suffered a sharp sell-off on Monday, but rallied back as concerns over the impact of the spread of the COVID-19 variant moderated, and a strong start to the earnings season drove the S&P 500 to end the week at all-time highs. High yield bonds also sold off on Monday, and while they partially recovered, spreads remained wider on the week. Investment grade corporate spreads were flat and outperformed high yield as rates were lower on the week.

Markets have aggressively priced in a shift in interest-rate and Federal Reserve (Fed) hike expectations, following the June Federal Open Market Committee (FOMC) meeting and an uptick in the spread of the COVID-19 Delta variant, as shown in the Chart of the Week. While the Fed’s dot plot reflects expectations of a slow approach to hiking the fed funds rate, with the average expectation of the fed funds rate not reaching 1% until 2024, market expectations are even slower, with the market currently pricing in a 1% fed funds rate in 2025.

Moreover, the dot plot shows an average expectation of 2.5% for the terminal fed funds rate— essentially, the Fed’s expectation for the long-term neutral fed funds rate—well below prior historical averages. But the market is currently pricing in an even lower terminal rate of only 1.7%. This expectation is the major reason why U.S. Treasury yields have fallen so much in recent weeks, as U.S. Treasury yields currently price that low terminal rate expectation, and no incremental premium for uncertainty or market volatility.

THE WEEK AHEAD

 

Tuesday
FOMC Meeting
Durable Goods Orders
U.S. Redbook
Case-Shiller Home Price Index
Consumer Confidence

Wednesday
U.S. International Trade in Goods
EIA Petroleum Status Report
FOMC Announcement
Fed Chair Press Conference

Thursday
U.S. GDP
U.S. Jobless Claims
Pending Home Sales Index

Friday
Personal Income & Outlays
Chicago Fed PMI
U.S. Consumer Sentiment





   

Index Returns

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1 Week YTD 1-YR 3-YR 5-YR
U.S. Aggregate 0.19 -0.75 -0.69 5.72 3.17
IG Corporates 0.21 -0.32 1.10 7.71 4.66
HY Corporates 0.09 3.99 11.64 6.98 6.72
Bank Loans -0.06 3.57 9.69 4.17 4.78
IG Corporates 1-3 Year 0.05 0.44 1.55 3.80 2.70
Global Aggregate 0.08 -2.52 1.24 4.54 2.69





   
   
      
      

TREASURY RATES

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Latest 1-YR Low 1-YR High 1-WK Change YTD Change 1-YR Change
2 Year 0.21 0.10 0.27 -2 9 6
5 Year 0.79 0.19 0.94 -7 42 50
10 Year 1.36 0.51 1.75 -6 45 74
30 Year 1.99 1.18 2.46 -5 34 67





   
   
      
      

CREDIT SPREADS

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Latest 1-YR Low 1-YR High 1-WK Change YTD Change 1-YR Change
IG Corporates 85 80 143 3 -11 -58
HY Corporates 269 262 597 2 -91 -328
EM Aggregate 278 263 401 7 -3 -122
CMBS 60 54 127 1 -21 -67
MBS 32 7 70 4 -7 -30
ABS 24 22 67 1 -9 -42





   
      
      

Other Indicators

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Latest 1-WK Change YTD Change 1-YR Change
S&P GSCI 531.76 -9.70 122.30 197.88
Crude Oil - WTI ($) 74.56 -0.60 26.04 34.94
5-Yr Breakeven Inflation Rate (%) 2.48 -0.03 0.52 1.26

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