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What's Driving Markets...

1. Economic data divergence continued during June, with notable strength in the US and Japan, while Europe and China surprised to the downside. US labor market data strength persisted and consumer confidence surged, though some measures of consumer health (e.g., retail sales, personal spending) deteriorated. However, in the eurozone, the manufacturing Purchasing Managers Index (PMI)1 fell deeper into contractionary territory, dragged down by new orders and employment, while services PMI expanded but at a slower pace. Manufacturing PMIs also contracted in China, weighed down by weaker global demand and a slowdown in small business operations.



US and Japan Surprised While China and Europe Disappointed
Citi Economic Data Surprise Index

As of 7/3/23. The Citigroup Economic Surprise Index represents the difference between official economic results and forecasts. A number above 0 represents economic performance that beat market expectations while a number below 0 represents economic conditions worse than expected. Data Sources: Citi, Bloomberg.


2. In Japan, the Bank of Japan (BOJ) and the Ministry of Finance both had important communications. The newly appointed governor of the Bank of Japan, Kazuo Ueda, stated that he doesn't believe inflation has yet hit the point at which it’s sustainable. This eases market concerns about an immediate end to Japan’s low interest-rate environment that's driven, in part, by the BOJ’s control of the Japanese government-bond yield curve.2 Additionally, the Ministry of Finance in Japan dropped hints that further yen weakness might result in a foreign-exchange intervention to stabilize against further cheapening.



The Japanese Yen Has Continued to Weaken
Japanese Yen vs. US Dollar

As of 6/30/23. Source: Bloomberg.

There have been several downside surprises to China’s reopening.


3. The People’s Bank of China (PBOC) is attempting to inject liquidity into its financial system with a cut to its 7-day reverse repo facility3 from 2.0% to 1.9%. Thus far, there have been several downside surprises to China’s reopening, such as low prints in manufacturing PMI for several months. We're looking closely at the Chinese policymaking community’s expected reaction function4 to the weaker data. The recent appointment of Pan Gongsheng, a highly respected technocratic deputy governor, as party chief of the PBOC signals how serious Beijing considers the current situation.

4. The Supreme Court stymied the Biden administration’s plans for large-scale debt forgiveness in elements of the federal student-loan programs. About $430 billion of student loans would have been forgiven under the proposal. The executive branch vowed to find another way. However, such actions will likely take some time, including a lengthy comment period under the current administrative process. Why is this important for fixed-income markets? The 18-29 age group has the largest student debt burden (FIGURE 3). Debt forgiveness would have been a substantial delevering event for this group and may have been a powerful longer-term tailwind for consumer spending. As a reminder, under the terms of the current debt-ceiling deal, the student-loan payment moratorium ends at the end of the summer.



Type of Debt Held by Americans by Age

As of Q1 2023. Source: New York Fed Consumer Credit Panel/Equifax


5. Commercial real estate (CRE) market fundamentals remain challenged. Commercial mortgage-backed security (CMBS) loan delinquencies increased to 3.5% in May, according to JP Morgan, and a large borrower during June stopped payment on a CMBS loan backed by two San Francisco hotels. However, in a positive development, a New York office building at 245 Park Avenue sold during the month at a valuation just 10% below its 2017 appraisal. The transaction suggests that there's some investor appetite for New York office space and reinforces our view that not all CRE is bad, just that performance will vary greatly by region/sub-market. Office and retail malls appear most at risk while the industrial and multifamily property segments should benefit from more stable net operating income and are starting from a position of relative strength.

6. Hawkish rhetoric rained at the European Central Bank (ECB) Forum on Central Banking in Sintra, Portugal. ECB President Lagarde signaled the council would have to do more than the market is pricing if companies don’t absorb the rise in wages into profit margins. And US Federal Reserve (Fed) Chair Powell remarked that rates have only started to become restrictive, laying the groundwork for the hiking cycle to continue. Meanwhile, Japan’s Governor Ueda suggested that if BOJ forecasts are right for 2024, it should be exiting its accommodative policies.


Canadian inflation data continues to run hot, powered by an unfazed Canadian consumer.


What’s Keeping Us Up at Night…

1. There was an attempted coup in Russia over the course of one weekend in June. A faction of the Russian military, the Wagner Group, seized the headquarters of the Southern Military District and then proceeded to drive on to Moscow. They did so with little or no effective opposition from the Russian military. Indeed, some commentators speculate that mutineers had either help or sympathy from elements of the Russian military. One cannot fully overestimate how dangerous this event was for broader geopolitical stability. Outright conflicts between factions of the armed forces in nuclear armed states are exceedingly alarming and highlight how much geopolitical risk can now start dominating markets. While the mutiny/coup ended, we believe there would have been a sharp market reaction if the events had not resolved themselves over the course of a few days. Prolonged conflict would have likely led to a risk sell-off and flight-to-quality trade.

2. The Bank of Canada (BOC) may continue to hike rates as Canadian inflation data still runs hot, powered by an unfazed Canadian consumer. The BOC was one of the first major central banks to signal a pause, amid confidence that the economy would slow below trend and labor-market spare capacity would ease, leading to lower service-based inflation. The resilience so far in the labor market, stickiness of wage growth, and strong underlying inflation pulse prompted a hike at the June policy meeting. Much like the Fed, it will be hard for the BOC to take comfort in a sustainable move lower and back toward target without a more material slowing in the cycle. As of this writing, Canadian futures markets are pricing in another ~1.5 hikes by the end of 2023.

3. Liquidity drainage continues with the Fed’s balance sheet unwinding and the Treasury General Account (TGA) continuing to resupply itself with funds consistent with its policy of US$600-700 billion. While the TGA refill has thus far primarily appeared to come from money market funds reducing their participation in the reverse repo facility, that may change as Treasury continues to ramp up issuance over the course of this year.


Investment Implications

  • The current risk rally is getting rather long in the tooth. With the overall expected slowdown in some sectors of the economy, it may also start to make sense to consider core bond/core bond plus5 positions as we approach the end of the tightening cycle. The sell-off in dollar rates during the previous year, rising geopolitical risk, and a gradually slowing economy make higher-quality fixed income attractive from a recessionary perspective. While inflation surprises still exist, a large portion of the move in rates has likely already occurred, providing substantial wiggle room and carry6 in case of upside inflation surprises. 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.
  • Shorter-duration7 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 would be indicative of robust carry.
  • Securitized8 credit could be a wise potential hedge against rate volatility since they offer attractive risk-adjusted spreads.9 Senior parts of the capital structure, in particular, seem attractive in case the cycle turns faster than expected.


Fixed-Income Sector Excess Returns

As of 6/30/23. Past performance does not guarantee future results. Excess returns are greater than the projected market rate of return. Indices are unmanaged and not available for direct investment. See below for representative index definitions. Sources: Bloomberg, JP Morgan, Wellington Management.


US Yields (%)

As of 6/30/23. Past performance does not guarantee future results. Source: Bloomberg


Fixed-Income Spreads (basis points)10

As of 6/30/23. US IG Corp is represented by the Bloomberg US Corporate Bond Index; US HY Corp is represented by the Bloomberg US Corporate High Yield Index, EMD 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 last page 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 Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. A reading above 50 signals economic expansion; below 50 signals contraction
2 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. 
3 Reverse repo is a security sold with an agreement to repurchase that same security at a specified price at an agreed upon time in the future. The difference between the sale price and the repurchase price implies a rate of interest paid by the central bank on the transaction.
4 Reaction function is a contingency plan for how a central bank will react to certain events or data releases. 
5 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.
6 Carry is the difference between the yield on a longer-maturity bond and the cost of borrowing.
7 Duration is a measure of the sensitivity of an investment’s price to nominal interest-rate movement.
8 Securitized credit involves pooling a large number of loans into an investable asset. Examples include mortgage-backed or asset-backed securities.
9 Spreads are the difference in yields between two fixed-income securities with the same maturity, but originating from different investment sectors.
10 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. 

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.

FIOWP009 2967073

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

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