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Over the half quarter of 2023, the LOM Fixed Income Fund gained 2.60% as higher yields on new securities offset lower principal values impacted by rising US interest rates across the curve.
The US experienced a deceleration in gross domestic product (GDP) growth during the first half of 2023, primarily influenced by rising interest rates and inflationary pressures on the economy. In the first quarter, the GDP grew by 1.8%, and projections indicate a modest 1.3% growth for the entire year of 2023. While the economy remains somewhat weak, concerns regarding an imminent recession have diminished since the beginning of the year. This is attributed to the relative stability of the housing market and the gradual recovery of demand for various goods and services which were previously impacted by the pandemic.
In the fixed income markets, the yield curve experienced an upward shift throughout the second quarter. Initially, the short-term end of the curve rose due to concerns surrounding a technical default related to the debt ceiling, and subsequently due to expectations of a more hawkish stance from the Federal Reserve.
The yield on the two-year Treasury note, which is particularly sensitive to Fed Funds rate expectations, started the quarter at 4.03% and concluded at 4.90%. Likewise, the 10-year U.S. Treasury note, often employed as a benchmark for mortgage pricing, began the quarter at 3.47% and concluded at 3.84%, indicating a 37 basis point increase in yield. Although the outlook for growth remains restrained in the face of tightening financial conditions, the Federal Reserve proceeded with another 25-basis point interest rate hike during its May meeting before pausing in June. The current target range for the Fed Funds rate stands at 5.00-5.25%.
The long-term end of the yield curve was supported by a decline in the inflation rate. Over the past year, inflation dropped to 4.9%, slightly below the previous month’s figure but still near a multi-decade high. Multiple indicators suggest that U.S. inflation surpasses the Federal Reserve’s 2% target, which has been cited as the primary reason for the central bank’s ongoing monetary policy tightening. Inflation has proven persistent due to the tightness of the labor market and the ongoing strong demand for core services.
In this environment, we continue to focus on short to medium term investment grade bonds on an issue specific basis.
The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.
