Fixed Income Markets: Month in Review - October 2024

In this article, we review: 

• October data releases that show the U.S. economy cooling
• Why October was a weak month for the fixed income market
• A closer look at how short duration, core bonds, high yield, emerging market debt, and floating rate bank loans performed

Macro & Rates 

Data releases in October continued to bolster our “cooling, not collapsing” view of the U.S. economy. Inflation came in a touch higher than expected in September. The consumer price index (CPI) rose 0.2% in September from August. On a year-over-year basis, the CPI fell to 2.4% in September — its lowest level in three years. Overall, third-quarter gross domestic product came in at 2.8% in the third quarter, as consumer spending continued to contribute to growth. 

Meanwhile, payroll data released November 1 showed the economy added a mere 12,000 jobs in October, likely due in part to the one-off negative influences of weather events and labor strikes. Meanwhile, the unemployment rate, which is based on a separate survey remained at 4.1% in October, the same level as the previous month.

Sources: Bureau of Economic Analysis, Moody's Analytics. Data as of November 2024.

Short Duration

While the teeter totter was at the low the end of slower economic growth, faster Fed cuts, and a two-year U.S. Treasury yield of 3.57% to start the month, it finished October on the other end with healthy growth, comfort with a Fed cutting path, and the two-year yield at 4.18%. The stronger economic growth path, however, was good for spread-based fixed income, though returns were negative for most bonds, with the higher yields leading to lower bond prices. 

The ICE BofA 1-3 Year US Corporate Index closed October at 55 basis points (bps) option-adjusted spread (OAS), 4 bps tighter on the month. However, yield to worst on that benchmark moved up substantially from 4.35% to 4.78%. At current all-in yields and spreads, short duration spread assets can provide solid risk-adjusted return prospects.

Core Bonds

For the last week of October, the Bloomberg US Credit Index ended the week 1 bp wider, closing the month of October at 79 bps. It was a mixed week for most other risky assets, but yields continued to push higher. New issuance for corporate debt was subdued given the higher rates and election overhang; however, the asset-backed securities market was active.

October in total was a weak month for markets, with bonds and equities losing ground. Economic data continued to surprise on the upside, which helped push back fears of a sharper downturn and led investors to dial back the likelihood of rapid rate cuts. But fiscal policy risks were also topical around the world, with a U.K. budget and U.S. elections of particular focus to end the month. While geopolitics was in the spotlight given events in the Middle East, oil only ended marginally higher. All this put sovereign bonds under pressure in October, dragging returns for the Bloomberg US Aggregate Index down 2.48%. This was positive for the U.S. dollar, however, which gained against most currencies even as gold also hit new highs. Spreads for corporate credit were tighter over the month as the higher yields and lower amount of issuance created a positive technical backdrop, sending spreads to tights of this cycle, past the 2021 lows.

High Yield

The high-yield market traded sideways during October as investors balanced headwinds and tailwinds, including looming uncertainty related to the U.S. elections. From a macro perspective, there was no shortage of news as the market digested developments related to the Middle East conflict, a dockworkers strike, and China stimulus policies. The upcoming U.S. elections were top of mind as the presidential race remains tight and investors continue to debate the potential economic implications. Within the rates market, the 10-year U.S. Treasury rose from around 3.7% to 4.3%. In addition, third-quarter, corporate earnings season kicked off with mixed results.

Despite all of this, the high-yield market was fairly quiet with no meaningful movements one way or the other. The Bloomberg US Corporate High Yield Index returned -0.54% during October, bringing the year-to-date return to 7.42%. Within the index, the more rate sensitive, higher-quality bonds declined the most with the BB portion of the index returning -0.92% followed by B-rated bonds at -0.44%. Meanwhile, CCCs posted a positive monthly return of 0.76%. The yield to worst increased slightly to 7.33%. Although there were pockets of modest widening during the month, the OAS ended tighter than last month with the index at 282 bps as of October 31.

Within the primary market, new issuance continued at a relatively average pace with approximately $27.2 billion pricing during the month. As expected, issuance slowed ahead of the U.S. election. Despite pockets of outflows, retail fund flows were net positive during the month with about $1.1 billion of inflows, making it the sixth consecutive monthly inflow to high-yield funds.

Floating Rate Bank Loans

For the month of October, the loan market rallied by 47 cents, to end at $96.08 for Credit Suisse Leveraged Loan Index. The three-year yield would usually decline based on the price increase for the index, but it rose by 43 bps throughout the month as future rate cut expectations lessened. The three-year yield stands at a still healthy 8.67% as a result.

October was dominated by three themes: 

1. Very strong CLO issuance, both new deals and resets, resulting in net growth in the loan investor base. 
2. Retail outflows over the summer turned back to inflows, which goes hand in hand with the backup in the three-year yield — more coupon for longer expected now. 
3. Robust primary calendar, albeit down from the record-breaking September, as some deals were pulled forward ahead of the election and opportunistic refinancings/dividends picked up on the back of the increase in animal spirits across broader risk assets. 

Re-pricings reared their ugly head again in the back half of October, which speaks to the upper hand borrowers have over investors currently. Heading into November, we expect many of these themes to remain, but U.S. elections could change that. 

Loan inflows totaled $2.7 billion in October; a strong month of inflows led by ETFs. CLO issuance was very strong in October and represented all flavors, new deals, resets, re-financings, middle market deals, etc., as sponsors look to lock in lower borrowing costs as a result of the massive CLO liability-spread tightening seen thus far in 2024, which continued to grind tighter in October.

Emerging Markets Debt

October has been a slightly nervous waiting mode for emerging markets debt (EMD), even if spreads have remained well anchored by some positive fundamental and technical dynamics. Negative returns during the month having been driven solely by the steepening of the U.S. Treasury yield curve. The recent sell off in U.S. yields is not just election odds changing, but also the stronger-than-expected resilience of U.S. economic data that has likely aided the moves in credit spreads. Headline spreads tightened by 24 bps, of which approximately 15 bps was an index adjustment attributable to Ghana’s bond exchange.

That restructuring adjustment aside, it was another month of broad high-yield/investment-grade compression with a number of factors at play, including: 

1. Positive impressions regarding Argentina’s macro policies from International Monetary Fund (IMF) meetings. 
2. Despite the war damage, Lebanon bonds responding positively to Israel’s success in removing the Hezbollah leadership, speculating that governance may eventually improve in the country. 
3. Sri Lanka recovering from pre-election anxieties over the continuation of its IMF program. 
4. A growing number of headlines regarding efforts to de-escalate the war in Ukraine, even if anything concrete feels some way off. 
5. The continued 2024 trend for net credit rating upgrades in both sovereigns and corporates. The few laggards have primarily concerned a lack of fiscal consolidation — an apparent theme across the asset class post-pandemic — and increased deficits to fund in the market, namely Romania, Panama, and Colombia in focus of late. 

Heading into November it is not all about the U.S., however, as China’s National People’s Congress session will likely unveil the long-awaited fiscal stimulus details on November 8. The market could be looking for an increasingly high headline number. 

Leading up to the U.S. election, investors have increasingly pulled money from EM hard currency funds, accelerating to $1.2 billion in the last week of October to take the aggregate four-week figure to $1.8 billion of outflows. Partially rowing back on the more constructive technical setup that held through the summer months. Primary market activity also died down, with only one notable sovereign actor in the past week that had to provide a comparably higher new-issue concession to that seen by equivalent-rated issuers in the weeks prior. The past month has also seen an increasing number of low-rated corporate issuers able to access markets, with double-digit coupons readily on offer to garner investor interest.

Source: Bloomberg. As of October 31, 2024.

Past performance is not indicative of future results. It is not possible to invest directly in an index, which also does not include the application of fees. Yield to worst (YTW) is a measure of the lowest possible yield that can be received on a bond that fully operates within the terms of its contract without defaulting.

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Index Definitions

The 10-Year U.S. Treasury bond is a U.S. Treasury debt obligation that has a maturity of 10 years

The Bloomberg Emerging Markets Aggregate Index measures the performance of hard currency Emerging Markets (EM) debt, including fixed and floating-rate U.S. dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers.   

The Bloomberg US Aggregate Bond Index is an unmanaged index used as a general measure of market performance.   

The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high-yield, fixed-rate corporate bond market.

The Bloomberg US Corporate Index measures the investment-grade, fixed-rate, taxable corporate bond market.

The Bloomberg US Government Bond Index is comprised of the U.S. Treasury and U.S. Agency Indices. The index includes USD-denominated, fixed-rate, nominal U.S. Treasurys and U.S. agency debentures (securities issued by U.S. government-owned or government-sponsored entities, and debt explicitly guaranteed by the U.S. government).

The Credit Suisse Leveraged Loan Index tracks the investable market of the U.S. dollar-denominated leveraged loan market.

The ICE BofA 1-3 Year US Corporate Index, a subset of the ICE BofA US Corporate Master Index, tracks the performance of US dollar denominated investment grade rated corporate debt publicly issued in the US domestic market. This subset includes all securities with a remaining term to maturity of less than 3 years.

Important Information

Fixed income securities are subject to risks including credit risk, interest rate risk, counterparty risk, prepayment risk, extension risk, valuation risk, and liquidity risk. The value of fixed income securities generally goes down when interest rates rise, and therefore the value of your investment in the fund may also go down. High yield bonds tend to be volatile and more susceptible to adverse events, credit downgrades and negative sentiments. Changes in interest rates, the market's perception of the issuers and the creditworthiness of the issuers may significantly affect the value of the Fund.

The risks of investing in foreign securities are magnified in emerging markets. Foreign and emerging market investments involve risks not associated with U.S. markets, such as currency fluctuation, adverse social and political developments, and the relatively small size, lower trading volumes and lesser liquidity of the markets.

*Aegon Asset Management US (Aegon AM US) is the marketing name of the sub-adviser. The legal entity name of the sub-adviser is Aegon USA Investment Management, LLC.

Aegon USA Investment Management, LLC is an affiliate of Aegon companies. Transamerica companies are part of the Aegon group.

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