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What's Driving Markets
"As is often the case, we are navigating by the stars under cloudy skies." – Federal Reserve (Fed) Chair Jerome Powell, Jackson Hole (August 2023)

1. During his speech at the Jackson Hole symposium, Fed Chair Powell left open the possibility of further rate hikes while acknowledging progress on the inflation front. Economic data has been moving in the right direction for the Fed to justify having reached the cycle peak in policy rates, and markets are no longer pricing in additional rate hikes. Data releases in August showed inflation accelerating, the unemployment rate increasing, and GDP growth falling short of expectations. Powell reiterated the Fed’s commitment to its 2% inflation target even as markets continue to price in rate cuts, with 100 basis points (bps)1 of easing expected by the end of 2024. With inflation expected to tick back up in the months ahead—driven by higher energy prices and healthcare regulatory changes—Powell’s resolve to achieve the Fed’s inflation target may be tested.

Markets Are Pricing in 2024 Rate Cuts Even as  the Fed Hints at More Rate Hikes Ahead
December 2024 Federal Funds Rate2 Futures (%)

December 2024 Federal Funds Rate Futures

As of 8/31/23. Source: Bloomberg.


China's central bank is moving to loosen monetary policy to re-stimulate an economy that's experienced a tepid reopening after the long COVID-19 lockdown.

2. US banking regulators unveiled new requirements for banks with $100 billion in assets or more, closing the size-threshold loophole that was a feature of post-Global Financial Crisis bank-reform rules. The key features of the proposed rules would be as follows (with compliance required up to three years after finalization of the rules):  

  • Living wills to deal with hypothetical unwinding of the institution—a painfully laborious process that details how a complex financial institution can be unwound without causing systemic risk.
  • Additional total loss absorbing capacity (TLAC),3 in the form of additional long-term debt issuance. The important takeaway: The regulatory burden for the formerly mid-tier banks is on an upward trajectory, despite the long finalization time period for the new rules.

3. China—in particular the People’s Bank of China—is moving rapidly to loosen monetary policy to re-stimulate an economy that's experienced a tepid reopening after the nation's long COVID-19 lockdown. In doing so, it has made cuts to its liquidity and policy rates and has reduced the foreign-exchange reserve requirements for domestic banks in an attempt to shore up the yuan. The central bank has also pushed for mortgage-rate reductions for a wide variety of households. It’s not clear whether these measures will provide enough firepower to restimulate the Chinese economy without substantial fiscal spending.   

4. Chinese property developer Country Garden reported that it missed coupon payments on two bonds, putting the privately owned entity into a 30-day grace period before the missed payment would be considered a default event. Country Garden’s missed payment does, however, further damage confidence in the market around the already struggling issuer.

5. Improvements to fixed-income liquidity, particularly in Treasury markets, were announced early in August with a more detailed plan by the Treasury Department during its quarterly refunding. Buried within its document release is a detailed plan for its buyback operations. Treasury buybacks4 are meant to relieve financial intermediary balance sheets of off-the-run coupon bonds. These securities will be replaced later with more liquid/desired on-the-run securities via the auction process. The Treasury believes that doing so will relieve strains on market liquidity.

6. Corporate default rates have been increasing, though they remain well below long-term averages. Earnings have shown more resilience than anticipated in 2023, although we expect to see further deterioration in fundamentals in the coming months driven by ongoing margin pressure and an increasingly cautious consumer. The lack of a maturity wall5 has helped keep defaults relatively contained; looking forward, issuers with unhedged floating-rate capital structures may experience pressure on free cash flow as higher interest rates continue to weigh on the broader economy. We expect default rates to move toward long-term averages (~4-5% for high yield and ~3-4% for bank loans) over the next 12 months, but we don’t a see a full-scale default cycle on the horizon.6   

Default Rates Are Expected to Move Closer to  their Long-Term Averages
US Corporate Bond Default Rates (2018-2023)

US Corporate Bond Default Rates - 2018-2023

As of 7/31/23. Sources: Moody’s, PitchBook Data Inc. 


What's Keeping Us Up at Night...

1. Geopolitical risk was prominent over the course of August:

  • The head of the Wagner Group, Yevgeny Prigozhin, was killed in a plane crash along with key lieutenants. This came just several weeks after an aborted coup attempt in Russia.
  • While not confined to August, a string of coups has rocked Africa over the last several months. From the Red Sea to the Atlantic, national militaries have destabilized governments across Africa. A power realignment has taken place with several countries breaking from their colonialist relationships while growing closer to Russia; in some cases, Wagner troops are expected to be on the ground. 
  • The BRICS7 summit took place near the end of  August. The summit's most important outcome was the welcome extended to new members Argentina, Ethiopia, Iran, Saudi Arabia, and Egypt.

2. Chinese policy response – If the Chinese policy response pivots from monetary to more fiscal stimulus, then we could see a jump in sovereign yields in response. While we don’t think the increase would be long term, it would likely shift sentiment in the near term regarding aggregate demand and put upward pressure on headline risk such as energy. Of course, by not doing enough stimulus, nascent Chinese growth can start to weigh on global growth at a point in the cycle in which the global expansion is still ongoing.  

3. Energy prices continue to climb, reaching new highs for 2023, moving above $80 per barrel of crude oil over the course of August. Production cuts from OPEC and continuing robust demand are providing a tailwind to prices. If there's a significant Chinese stimulus, we'd see additional pressure on energy pricing. The upward movement takes away the relief in headline Consumer Price Index8 that we’ve seen over the course of much of this year.


Production cuts from OPEC and continuing robust demand are providing a tailwind to energy prices. 


Crude Oil Prices Surged to More Than $80 Last Month
WTI Per-Barrel Prices Ended 9/6/23

WTI Per-Barrel Prices Ended 9-6-23

Prices based on West Texas Intermediate crude oil futures. Source: Bloomberg.


4. US government shutdown – September 30 is considered the end of the federal government’s fiscal year. A showdown is once again looming between the US House of Representatives and the Biden administration in terms of budget negotiations and appropriations required to keep the government funded and open. While it’s likely that a short-term resolution will be passed in order to give both sides time to negotiate, there’s an increasing likelihood of a government shutdown. Shutdowns tend to result in a drag on GDP growth.


Investment Implications for Consideration

  • Given where spread9 levels are in many sectors, core bond/core bond plus10 positions may make sense as we gradually approach the end of the tightening cycle. Last year’s sell-off in dollar rates, rising geopolitical risk, and a gradually slowing economy make higher-quality fixed income attractive from a recessionary perspective, as well as for positive convexity.11 While inflation surprises still exist, a large portion of the move in rates has likely already occurred, potentially providing wiggle room and carry12 in case of upside inflation surprises. This view continues to grow in conviction, but we know that in the near-term returns may be primarily carry-driven until the economy slows further.
  • We continue to think that this is the environment for global sovereign and currency strategies to shine from a total-return perspective and a risk diversifier approach. This is another, more diversified, approach to monetize the ongoing and expected volatility of global capital markets.
  • 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.
  • Shorter duration14 credit could pay 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 8/31/23. 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 8/31/23. Past performance does not guarantee future results. Source: Bloomberg.

Fixed-Income Spreads (bps)

Fixed-Income Spreads - bps

As of 8/31/23. US Investment-Grade (IG)15 Corp is represented by the Bloomberg US Corporate Bond Index; US High-Yield (HY)16 Corp is represented by the Bloomberg US Corporate High Yield Index, Emerging-Market Debt (EMD)17 is represented by the JP Morgan EMBI Plus Index, Bank Loans are represented by the LSTA Leveraged Loan Index; and MBS is represented by the Bloomberg US MBS Index. See below for representative index definitions. Source: Bloomberg, JP Morgan, Morningstar LSTA.

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


1 A basis point 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. 

2 The federal funds rate is the target interest rate set by the Federal Open Market Committee. This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.

3  Total Loss Absorbing Capacity (TLAC) refers to an internationally recognized standard designed to ensure that Global Systemically Important Banks possess adequate equity and debt instruments to effectively transfer losses to investors and minimize the need for government bailouts.

4 Treasury buybacks are a cash-management tool providing the Federal Reserve with flexibility in managing public debt. Buybacks enable the Fed to purchase higher-yielding debt and replace it with lower-yielding debt, helping to reduce government interest payments.

5 A maturity wall refers to the period in which existing debt arrangements come due or approach maturity. Issuers often seek to extend the maturity wall further by refinancihg their debt.

6 The FIGURE 2 chart uses a methodology for calculating default rates that differs from PitchBook Data Inc., PitchBook excludes distressed exchanges, making bank-loan default appear artificially low.

7 BRICS is an acronym for an economic alliance among five original emerging-market countries: Brazil, Russia, India, China, and South Africa.

8 The Consumer Price Index 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."

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

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.currency exposures to enhance returns. 

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.

FIOWP012 3117976

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



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