Fixed Income

Fixed Income Commentary – August 2023

On The Job

Bond yields rose marginally during July, but only in certain tenors: the very front end of the curve rose in response to the Fed’s 11th rate hike of the cycle, and five-year and longer tenors also rose by 2-15 basis points.  Meanwhile, municipal bonds performed well as supply remains constrained and demand is strong.  The net result was a very modest gain in the broad market — the total return for the Bloomberg U.S. Intermediate Aggregate Index was 0.15% — and a modest gain for the municipal sector — the total return for the Bloomberg Municipal Index was 0.40%.

After the June pause, the Fed came through with another rate hike of 25 basis points on July 26, which brings the Fed’s federal funds target rate to a range of 5.25%-5.50%.  This move came as no surprise to the markets after plenty of Fed speakers indicated more tightening was warranted.  The spate of economic reports since the May hike has displayed a good deal of strength and the inflation data, while lower, has not yet demonstrated enough of a drop for any real length of time and some recent developments could provide a lift to inflation in the coming months.

While we have written repeatedly about the strong labor market, we have also acknowledged the monthly labor reports are a lagging indicator.  That said, weekly initial jobless claims fell to five-month lows toward the end of July and continuing claims have turned lower since the spring.  The apparent settlement between UPS and the Teamsters is another sign that labor markets are tight.  Only 6% of private sector workers are covered by union contracts, but strikes are becoming more common and that does present a risk for labor cost trends. 

In terms of other economic reports we are watching, the manufacturing sector is contracting, but the service sector is in solid expansion territory.  Also, personal consumption figures for June were the strongest since January, suggesting that consumers are feeling more confident and are willing to spend.

July has also brought the first set of earnings reports and initial results have, on balance, been favorable: with nearly half of the S&P 500 having reported, sales and earnings growth have been 5% and 3% respectively (year over year).  This helped propel the S&P 500 to another solid gain of 6.60% for the month.  Rising home prices also may have helped lift consumer sentiment readings.  The ISM Manufacturing survey is below 50, indicating a contracting sector, but the Services index is comfortably above 50 and at its highest reading in four months.  Lastly, the first read on second quarter GDP was better than expected at 2.4% annualized.  While it may be a stretch to call the economy hot, it is certainly on much firmer footing than most had expected after eleven rate hikes in just under a year and a half.

Corporate bond spreads have also benefited from the improving sentiment on the economy and earnings.  Spreads are tighter for most sectors for the month, although spreads on financial sector bonds remain wider than at the start of the year due to some lingering concerns since the bank failures this spring.  In the municipal sector, robust demand for municipal bonds has driven valuations toward the tighter end of their range which helped lift returns in July.

Looking ahead, the bond market will be looking for direction from incoming inflation reports to gauge how much additional tightening may be in store.  Conversely, if the economic backdrop suddenly deteriorates more dramatically than expected, the extended time period for the Fed to remain on hold may be shortened.  All of this is another way to say that further monetary policy tightening is data dependent.  After 525 basis points of policy tightening since March of last year, the Fed is close to being done as long as inflation remains on a downward trajectory.

We wish all our readers a pleasant rest of the summer and hope for a cooling trend for those experiencing record-high temperatures.

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.  Past performance is not indicative of future results

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.