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Over the first three quarters of 2023, the LOM Fixed Income Fund gained 2.66% as higher yields on new securities offset lower principal values impacted by rising US interest rates across the curve.
Global economic growth slowed in Q3 amid high inflation and rising interest rates. Yet despite these drags, the global economy remained resilient, albeit broadly uneven across regions and sectors. On the positive side, inflation, although still elevated in many major economies, appears to have leveled off and interest rates appear to be close to peaking. However, challenges remain. For example, China is falling below growth expectations after reopening.
In the U.S., economic growth came in stronger than expected in Q3, improving the chances of a soft landing in the near term. However, there is a growing consensus that the fourth quarter could be more challenging due to the lagged impact of tighter of monetary policy, the return of student debt servicing in October and the automotive workers strike which could be prolonged. Also, soaring oil and gas prices could further pressure economic growth.
Following a series of central bank meetings across the developed markets during the last weeks of September, the consistent message was that rates are close to a peaking. While central bankers are indicating that rate hikes are no longer required, they are also signaling that rate cuts are not yet needed. This fits with the “higher for longer” forward guidance from almost all policymakers (most notably the Fed) who are unwilling to signal easier policy with inflation still above central bank targets.
Inflation maintained its central role in fixed income markets during the third quarter. Long-term bond prices experienced a decline in response to the Federal Reserve’s affirmation of prolonged high interest rates. Despite the persisting inversion of the yield curve, it has moderated to some extent. The enduring inversion has prompted some to contemplate the possibility of an impending recession. However, prevailing sentiment coalesces around the notion of a “soft landing,” supported by the marginal narrowing of corporate spreads. This narrowing suggests a diminishing concern regarding corporate debt defaults.
In this environment, we continue to focus on short to medium term investment grade bonds which we find attractive 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.
