Fixed Income

Fixed Income Commentary – December 2022

Claus and Effect

Bond yields declined in November across all points on the yield curve beyond one year as investors became convinced that the Fed’s tough talk will soon give way to a pause. On the economic front, there were hints that inflation may have peaked while growth remains positive which could mean the possibility of a soft landing remains real. The end result for the Bloomberg U.S. Intermediate Aggregate Index was 2.80%, while the Bloomberg Municipal Index returned an even more impressive 4.68%.

The pivotal report that led to a more bullish view in bonds was the better-than-expected CPI release, which many interpreted as the start of a decline in inflation that could provide the Fed with the justification it needs to slow the pace of its tightening policy.  After the 50bp (0.50%) rate hike on December 14 and the likely two more 25bp moves in early 2023, the end may be within sight. The expected ending level of rates, referred to as the peak or terminal rate, has been ratcheting up all year in the wake of the persistent inflation figures as well as comments from Fed officials. Most now seem to be expecting the Fed to stop at around 5% and stay there for an extended period until it is clear that inflation has been reduced, even if it means a recession.

Other economic reports provided plenty of evidence that growth remains positive. The ISM Services report came in solidly above 50 again which indicates expansion, while the monthly employment report was also better than expected. Retail sales came in higher as did the durable goods report which indicates that businesses are increasing their capital expenditures (“capex”).

Another sign that growth remains intact is bank loan activity, specifically for Commercial & Industrial loans, which is consistent with capex growth (inventory is also often financed this way). Credit growth is an essential ingredient in any economic expansion and bank loans are growing at a healthy pace even with higher interest rates.

Make no mistake: the Fed remains staunchly committed to taming the demand side of the economy, which may allow supply-side price pressure to dissipate. Restoring price stability is now the number one goal of this Fed. Any signs that tight conditions are loosening would be a welcome relief for the Fed as they seek to restore their inflation-fighting credentials. One example is the October JOLTS report which showed that job openings fell by 353K to 10.33M. This slight retrenchment is a sign that employers are paring back hiring plans which may ultimately lead to slower wage gains. If the labor market cools off without massive job losses, the elusive soft landing may still be possible.

The quit rate also declined for the sixth time in seven months to its lowest level in 17 months, indicating fewer voluntary departures which were helping drive wages higher when the jobs market was red-hot last year. Incidentally, the quit rate remains highest in the Leisure & Hospitality industry, which demonstrates not only that the pandemic continues to thwart the return to normal, but also that it continues to distort economic data and trends.

Powell’s speech on the last day of November signaled a more moderate pace of rate hikes is now imminent which sent bond yields even lower. A slower pace makes sense as it allows the four successive rate hikes of 75bps each. In mentioning this slower pace, Powell noted the lag from monetary policy which simply means the effects of higher rates are not fully felt for some time.

In terms of sector performance, risk spreads on corporate bonds narrowed in November leading to outperformance for corporates compared to same-duration Treasuries. Municipal bonds also performed significantly better than Treasuries due to strong demand from investors for some of the highest tax-exempt yields seen in years. Even mortgage-backed securities (MBS) had a solid return for the month after a tough period earlier this year.

After the big rally, market yields now prevailing appear a bit too low given the risk that the Fed may need to go to a higher terminal rate if inflation proves intractable. Still, yields remain substantially higher than what was on offer during the last few years. Yields may inch higher between now and year-end if only due to the looming Fed hike. In the meantime, we wish all our readers a happy holiday season filled with whatever brings meaning and enjoyment to you.

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.