Fixed Income

Fixed Income Commentary – August 2022

Serenity Now

July was an eventful month for the bond market: most points along the yield curve declined quite substantially as the market’s concerns about a looming recession gained intensity, particularly following the first read on second quarter GDP.  This report was fodder for the declining momentum narrative and the widely-held view that two consecutive quarters of negative growth denotes a recession.  As a result, the Bloomberg Barclays U.S. Intermediate Aggregate Bond Index returned 2.17% for the month, while the Municipal Bond Index returned 2.64%.

On July 27, the Fed’s FOMC raised the federal funds rate by 75bps (0.75%) in a well-telegraphed move aimed at slowing the economy and halting inflation.  Just a day later, the first estimate of second quarter real GDP was released and it was a disappointing -0.9% annual rate.  Since the first quarter GDP report was also negative, the media is widely reporting that a recession is all but official.  Adding to the chorus of a weakening economy were earnings reports from Walmart and others showing that consumers are scaling back from goods consumption, which had spiked higher during the pandemic, back toward more spending on services such as dining and travel.  In addition, consumers appear to be reacting to high inflation by prioritizing certain less discretionary spend categories and/or substituting lower priced goods.  There is certainly no supply constraint regarding tough, and often conflicting, economic news in 2022.

Now that two consecutive quarters of GDP growth have occurred, at least based on the preliminary reading, are we in a recession?  It seems difficult to fathom with an unemployment rate of just 3.6%, but most consumers do appear fixated on inflation and the dip in the markets and consumer confidence measures are gloomy.  However, the official task of dating business cycles is up to a committee, the National Bureau of Economic Research (NBER).  This group of eight esteemed academic economists must determine when “a significant decline in economic activity that is spread across the economy and lasts more than a few months” has occurred and therefore we likely will not know until more data has been analyzed (the final Q2 GDP revision will be reported at the end of September).  According to Bank of Montreal’s economist, a recession requires depth (“significant decline”), diffusion (“spread across the economy”), and duration (“more than a few months”).  Importantly, the set of six monthly economic indicators used by the NBER is weighted most heavily toward real personal income (less transfers) and payrolls.

Incidentally, the shortest recession in history (since 1874) was the pandemic-related shutdown, which was man-made and officially lasted just two months but certainly had depth and diffusion.  The longest post-1950 recession was the Great Financial Crisis of ’07-’09, which lasted eighteen months.  Finally, the average recession has lasted ten months.

One of the main factors that drove the weak GDP report was slower inventory accumulation, which alone chopped 2 percentage points from Q2 GDP after accounting for 0.4% in Q1.  This reflects some of the difficulties stemming from the pandemic boom in goods consumption and now the post-lockdown reality of shifting spending back toward services.  The pandemic- and war-related supply chain disruptions do appear to be ebbing and some commodity prices have retreated, but the broad economy is still dealing with many problems associated with the various lockdowns and geopolitical troubles.

Risk spreads declined during July which led to decent performance from corporate bonds, MBS, and municipal bonds relative to Treasuries.  This fits well with the “risk on” sentiment of the equity market in July and could be a sign that peak pessimism has passed.  The peak pessimism theme has also been mentioned by many Fed watchers who believe the FOMC will soon begin scaling back its tightening impulse as recession fears intensify.  Given the large impact that higher real estate prices are having on the inflation figures, this hope seems a bit premature.  Still, what does seem certain is that consumers are shifting their buying habits in response to higher inflation and ultimately high prices will help cure inflation, but it will happen in varying degrees across the economy.

With August now upon us and markets feeling more sanguine, we expect many of our readers will be enjoying some well-deserved vacation time.  We hope whatever your plans are, you will find some time for rest and relaxation before the summer comes to an end.

Important Disclosures

Maple Capital Management, Inc. (MCM) is an independent SEC Registered Investment Advisor with offices in Montpelier, Vermont and Atlanta, Georgia.

This commentary reflects the views of MCM and should not be considered to be investment or financial advice. MCM does not warranty these views and will not update this communication after the date of publication. Any mention of specific securities is done for illustrative purposes and the securities mentioned may or may not be held in client accounts. No assumption or assurance should be taken that securities mentioned will be safe or profitable investments.

For further information, please contact Steven Killoran at 1-802-229-2838 or at [email protected]. For further information about Maple Capital, including a copy of our informational brochure, please visit our website at

Index Definitions

The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

The Bloomberg Intermediate US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market with less than 10 years to maturity. The securitized sector is wholly inluded. The index includes Treasuries, government-related and corporate securities, MBS, ABS and CMBS..

The Bloomberg US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index. STRIPS are excluded from the index because their inclusion would result in double-counting.

The Bloomberg US Credit Index measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government related bond markets. It is composed of the US Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities.

The Bloomberg US Mortgage Backed Securities (MBS) Index tracks fixed-rate agency mortgage backed pass-through securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage.

The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded.

The Bloomberg U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.