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Over the first quarter of 2023, the LOM Fixed Income Fund gained 1.65% as intermediate to
longer-term interest rates declined despite steadily rising short term interest rates.
Responding to the Federal Reserve’s almost unprecedented barrage of restrictive monetary
policies during the course of 2022, bond prices declined throughout the year. Fed policy
initiatives included seven large interest rate hikes, quantitative tightening and an historic
shrinking of the money supply as defined by M2.
Early this year, however the bond market managed to finally catch a bid as the US treasury yield
curve became increasingly inverted with the market anticipating rates to level off soon. The
short end of the curve, below one year continued moving higher, as the four-month Treasury bill
reached 4.95%. However, long-term bonds rallied as the regional banking crisis drove investors
to safe haven assets. The 10-year treasury yield dropped from 3.9% to 3.4% within a few weeks.
The risk premium for investment grade bonds ended the quarter at similar level to the beginning
of the year.
In Q1, the Federal Open Market Committee (FOMC) voted unanimously for a quarter point rate
hike at both the February and March meeting, bringing the Fed Fund target rate to a range of
4.75-5%. Fed chairman Jerome Powell has once again indicated the committee’s commitment
to bringing inflation back to a target rate of two percent, despite the banking turmoil. According
to the FOMC dot plot, which is a survey of policymakers’ rate projections, another 0.25% rate
increase will happen this year, but then rates will shift lower in 2024.
The fed funds future market has priced in a rate cut as soon as the second half of this year. In
this environment, we continue to favor investment grade corporate bonds to government issues.
We have a focus on short to medium term bonds while selectively picking longer dated fixed
income products as opportunities arise.
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.
