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What's Driving Markets...
1. We've been remiss in not discussing the recent bear steepener, a somewhat uncommon phenomenon in fixed-income markets, which drove rate markets in August and September. A bear steepener of the yield curve1 occurs when all rate markets move higher—but with a greater magnitude at the longer end of the yield curve. It indicates several possibilities:

  • A natural movement away from an inverted yield curve2 and its implications of imminent recession (FIGURE 1). As the Federal Reserve (Fed) nears the event horizon of its hiking cycle, expectations of cuts without a sudden recession are beginning to take hold.
  • Higher expected real yields or inflation breakevens3 (in this case the movement was primarily in real yields).
  • A return of term premium, or the compensation above the long-term expected policy rate that investors require in case forward yields rise faster than expected.
  • Treasury supply, a popular narrative, has also driven market chatter. We find this last one the least compelling driver, given the weak link between issuance sizes and rates in most developed markets.



The Yield Curve Inversion Reversed Itself in Late September
US Treasury Yields (%) and Spreads4 (bps)5—April through September, 2023

US Treasury Yields % and Spreads bps - April through September, 2023

As of 9/30/23. Source: Bloomberg.


2. The spate of economic data generally exceeded expectations, yet bond yields rose, and equities sold off—flipping the "good news is bad news" narrative on its head. Several widely monitored releases, including non-farm payrolls, jobless claims, core inflation, manufacturing and services ISM indices,6 retail sales, and durable goods all came in stronger than expected, though housing data generally remained weak, and consumer confidence took a hit. In outright good news, both core Consumer Price Index (CPI) and the core Personal Consumption Expenditures (PCE) index7 moderated in the most recent data.

3. Italian government bond spreads widened vs. German bunds after the Italian government announced a higher-than-expected budget deficit of 5.3% of GDP (see FIGURE 2). The European Commission still needs to approve the budget plan from Italy, which has one of the European Union’s (EU) highest debt-to-GDP ratios—a challenge given the lack of a fiscal union in the EU.



Italian Deficits Prompt Widening Bond Spreads vs. German Bunds
Italy-Germany 10-Year Government Bond Spreads (bps)

Italy-Germany 10-Year Government Bond Spreads - bps

As of 10/2/23. Source. Bloomberg.


We'll continue to closely track the impact of the United Auto Workers strike.


4. India will be included in JP Morgan's family of Emerging-Market (EM) Bond Indices starting in June 2024  (at 1% per month until reaching a 10% weight in the index). This inclusion should improve the indices’ country diversification and widen the EM local-debt opportunity set for investors. It will also enable India to have greater access to financing and attract foreign capital for its growing debt markets.

5. We will continue to closely track the impact of the United Auto Workers strike. The US generally has a lower level of unionization vs. other developed countries (11% compared to 16% and 25% for Germany and the UK, respectively8). This has typically been the case for several decades in Europe, where the influential IG Metall union in Germany served as a symbol of labor-market power.

6. The Bank of Japan (BOJ) was active in September of BOJ Governor Kazuo Ueda disappointing market hawks hoping for firmer statements on exiting loose monetary policy. Ueda stated that the BOJ believes it hasn’t sufficiently established price stability, and that the bank is prepared to be patient. The BOJ also conducted a surprise unscheduled bond-buying operation late in the month—adding heft to the governor’s words. The yen continues to depreciate (FIGURE 3), and we expect some form of currency intervention as it approaches the sensitive level of 150 vs. the US dollar.



The Japanese Yen Continues to Depreciate Against the Dollar

The Japanese Yen Continues to Depreciate Against the Dollar

As of 10/1/23. Source. Bloomberg.


A late-cycle policy mistake is possible by central banks, which have a challenging course to navigate if disinflationary factors run out of steam.


What's Keeping Us Up at Night...
1. Serbian army units deployed to forward operating bases near Kosovo over the course of the last few weeks. Elements of those units were pulled back after US policymakers issued warnings of punitive actions. The NATO peacekeeping force in the area was reinforced with British troops.

2. Following the unnecessary debacle of the Fitch downgrade, the US narrowly avoided a government shutdown ahead of the October 1 deadline and instead passed a short-term continuing resolution. The shutdown would have had a few direct impacts: Our economists predicted it would likely have shaved several tenths of a percent from growth and may have finally ended the patience of Moody’s, the last of the nationally recognized statistical rating organizations that still maintains a Aaa rating on the US.

3. A late-cycle policy mistake is possible by central banks, which have an extremely challenging course to navigate if disinflationary factors run out of steam. If that’s the case, there’s an increased chance that “higher-for-longer” leads to a sharper downturn than is currently anticipated by capital markets.

4. Higher energy prices continue to contribute to market jitters. An upward movement of oil prices complicates the current inflation picture. While it doesn’t immediately impact core prices, it does influence headline inflation and, possibly, inflation expectations. Private-sector capital expenditure, as noted by the Baker Hughes rig count9 (FIGURE 4, left), still hasn’t moved upward in line with the movement in oil, indicating a domestic lag in responding to sharply higher energy prices.



Recent Crude Oil Price Increases Have Added to Market Jitters

WTI and Brent Crude Price-per-Barrel Trends - left - Strategic Petroleum Reserve Supplies per 1000 Barrels - right

Crude-oil and rig-count figures as of 9/30/23. Strategic Petroleum Reserve inventory figures as of 9/22/23. WTI (West Texas Intermediate) and Brent are two of three primary oil-price benchmarks. Source: Bloomberg.



Investment Implications for Consideration

  • Given how drawn out and uncertain the rate cycle has been year-to-date, we favor higher-quality total-return strategies that are less constrained by benchmarks. This could include global-sovereign and currency strategies that shine during these periods, or “go anywhere” strategies able to navigate the late cycle. 
  • We acknowledge the tumult of rate markets this year. But, given where spread levels are in many sectors, we think core-bond and core-bond-plus10 positions make sense as we (gradually) approach the end of the tightening cycle. The gradual cooling of inflation and slowing of the economy makes higher-quality fixed income attractive from a recessionary perspective, as well as for positive convexity.11 Carry12 on such strategies has only grown more attractive, providing additional buffers to rate volatility. We adhere to this view but we know that near-term volatility abounds until there’s continued evidence of a slowing economy. 
  • Securitized credit13 could be a potential hedge against rate volatility since it offers attractive risk-adjusted spreads. Senior parts of the capital structure, in particular, seem attractive in case the cycle turns faster than expected.
  • Long/short credit may be a prudent way to manage credit volume in the current environment while taking a less directional view of spreads.
  • Shorter-duration14 credit pays well given the ongoing volatility and uncertainty in markets. For low-risk appetite thresholds, the opportunity cost of this approach has diminished substantially over the last several months, and the “higher-for-longer” approach could be indicative of robust carry.




Fixed-Income Sector Excess Returns

Fixed-Income Sector Excess Returns

As of 9/30/23. Past performance does not guarantee future results. Excess returns are defined as investment returns from a security or portfolio that exceed a benchmark or index with a similar level of risk. Indices are unmanaged and not available for direct investment. See below for representative index definitions. Sources: Bloomberg, JP Morgan, Wellington Management.


US Yields (%)

US Yields - %

As of 9/30/23. Past performance does not guarantee future results. Source: Bloomberg.


Fixed-Income Spreads (bps)

Fixed-Income Spreads - bps

As of 9/30/23. US IG15 Corp is represented by the Bloomberg US Corporate Bond Index; US HY16 Corp is represented by the Bloomberg US Corporate High Yield Index; EMD17 is represented by the JP Morgan EMBI Plus Index; Bank Loans are represented by the LSTA Leveraged Loan Index; MBS is represented by the Bloomberg US MBS Index. See below for representative index definitions. 

To learn more about opportunities in fixed income, please talk to your financial representative.


1 The yield curve is a line that plots interest rates of bonds having equal credit quality but differing maturity dates; its slope is used to forecast the state of the economy and interest-rate changes.

2 An inverted yield curve shows that long-term interest rates are less than short-term interest rates. The inverted curve has proven in the past to be a reliable indicator of a recession.

3 Break-even inflation is the difference between the nominal yield on a fixed-rate investment and the real yield (fixed spread) on an inflation-linked investment of similar maturity and credit quality.

4 Spreads are the difference in yields between two fixed-income securities with the same maturity but originating from different investment sectors.

5 A basis point (bps) is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indices and the yield of a fixed-income security. 

6 ISM manufacturing index stands for the Institute for Supply Management index. Also known as the Purchasing Managers' Index (PMI), it's a monthly indicator of US economic activity based on a survey of purchasing managers at more than 300 manufacturing firms.

7 The CPI in the US is defined by the Bureau of Labor Statistics as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The Personal Consumption Expenditures (PCE) index includes a measure of consumer spending on goods and services among US households.

8 OECD and Bureau of Labor Statistics.

9 Baker Hughes Company, one of the world's largest oil-field services  companies, has issued rotary rig counts as a service to the petroleum industry since 1944. Rig counts are an important business barometer for the drilling industry and its suppliers.

10 Core/core plus typically invest in a baseline of investment-grade bonds such as government, corporate, and securitized debt. Core-plus funds can take that baseline and add additional sectors such as corporate high-yield, emerging-market debt, or non-US currency exposures to enhance returns.

11 Convexity is the relationship between bond prices and bond yields.

12 Carry is the difference between the yield on a longer-maturity bond and the cost of borrowing.

13 Securitized credit involves pooling a large number of loans into an investable asset. Examples include mortgage-backed or asset-backed securities. 

14 Duration is a measure of the sensitivity of an investment’s price to nominal interest-rate movement.

15 Investment-grade (IG) securities are fixed-income securities that are rated at "BBB" or higher by Standard & Poor’s or Moody’s.

16 High-yield (HY) securities, or "junk bonds," are rated below-investment-grade because there is a greater possibility that the issuer may be unable to make interest and principal payments on those securities. 

17 Emerging-market bonds (EMD) are debt instruments issued by developing countries. These bonds tend to offer higher yields than Treasuries or corporate bonds in the US. Emerging-market issues tend to carry higher risks than domestic debt instruments.

Global Aggregate is represented by the Bloomberg Global Aggregate Index, a broad-based measure of the global investment-grade fixed-rate debt markets. Euro Aggregate is represented by the Bloomberg Global Aggregate Index - European Euro, which includes fixed-rate, investment-grade Euro denominated bonds. UK Aggregate: Bloomberg Global Aggregate Index - United Kingdom which includes fixed-rate, investment-grade sterling-denominated bonds. US Aggregate: Bloomberg US Aggregate Bond Index is composed of securities from the Bloomberg Government/Credit Bond Index, Mortgage-Backed Securities Index, Asset-Backed Securities Index, and Commercial Mortgage-Backed Securities Index. US Fixed MBS: Bloomberg Agency Fixed-Rate MBS Index tracks fixed-rate agency mortgage backed passthrough securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). US CMBS: Bloomberg CMBS ERISA Eligible Index, which measures the performance of investment-grade commercial mortgage-backed securities, which are classes of securities that represent interests in pools of commercial mortgages. The index includes only CMBS that are Employee Retirement Income Security Act of 1974. US ABS: Bloomberg Asset-Backed Securities Index, the ABS component of the Bloomberg US Aggregate Index, which has three subsectors: credit and charge cards, autos, and utility. US IG Corporates: Bloomberg US Corporate  Bond Index covers all publicly issued, fixed rate, nonconvertible, investment-grade debt. US Corporates Aaa: Bloomberg Aaa Corporate Index designed to measure the performance of investment-grade corporate bonds that have a credit rating of Aaa; US Corporates Aa: Bloomberg Aa Corporate Index; US Corporates A: Bloomberg A Corporate Index, designed to measure the performance of investment-grade corporate bonds that have a credit rating of Aa; US Corporates Baa: Bloomberg Baa Corporate Index; designed to measure the performance of investment-grade corporate bonds that have a credit rating of Baa; US High-Yield Corporates: Bloomberg US Corporate High Yield Index is an unmanaged broad-based market-value-weighted index that tracks the total return performance of non-investment grade, fixed-rate, publicly placed, dollar denominated and nonconvertible debt registered with the Securities and Exchange Commission. Global IG Corporates: Bloomberg Global Credit - Corporate Index is an unmanaged index considered representative of fixed rate, non-investment grade debt of companies in the US, developed markets, and emerging markets. Emerging-Markets Debt: Bloomberg Emerging Markets Hard Currency Index includes USD-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers. Bank Loans: LSTA Leveraged Loan Index, which is a market-value-weighted index that is designed to measure the performance of the US leveraged loan market based upon market weightings, spreads, and interest payments. JP Morgan Emerging Markets Bond Index Global Index is a broad-based, unmanaged index which tracks total return for external currency denominated debt (Brady bonds, loans, Eurobonds and US dollar-denominated local market instruments) in emerging markets. Bloomberg US MBS Index tracks fixed-rate agency mortgage backed pass-through securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).

“Bloomberg®” and any Bloomberg Index are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indices (collectively, “Bloomberg”) and have been licensed for use for certain purposes by Hartford Funds.Bloomberg is not affiliated with Hartford Funds, and Bloomberg does not approve, endorse, review, or recommend any Hartford Funds product. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to Hartford Fund products. 

Important Risks: Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. • Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. • Mortgage-related and asset-backed securities’ risks include credit, interest-rate, prepayment, and extension risk. The value of the underlying real estate of real estate related securities may go down due to various factors, including but not limited to strength of the economy, amount of new construction, laws and regulations, costs of real estate, availability of mortgages, and changes in interest rates. • Loans can be difficult to value and less liquid than other types of debt instruments; they are also subject to nonpayment, collateral, bankruptcy, default, extension, prepayment and insolvency risks. • Foreign investments may be more volatile and less liquid than US investments and are subject to the risk of currency fluctuations and adverse political, economic and regulatory developments. These risks may be greater, and include additional risks, for investments in emerging markets. • Diversification does not ensure a profit or protect against a loss in a declining market. 

The views expressed herein are those of Wellington Management, are for informational purposes only, and are subject to change based on prevailing market, economic, and other conditions. The views expressed may not reflect the opinions of Hartford Funds or any other sub-adviser to our funds. They should not be construed as research or investment advice nor should they be considered an offer or solicitation to buy or sell any security. This information is current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.

FIOWP013 3174730

Insight from sub-adviser Wellington Management
Author Headshot
Managing Director at Wellington Management LLP and Fixed-Income Strategist for Hartford Funds



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