Fixed Income

Fixed Income Commentary – January 2023

A Slope to New Beginnings

December brought the last rate hike by the Fed for the year, but almost certainly not the last for this cycle. This latest move of 50 bp (0.50%) brings the Fed’s official policy rate — the federal funds rate — to 4.25%-4.50%. These policy changes continue to be well-telegraphed, but the Bank of Japan (BoJ) still believes there is value in surprising markets and did just that by increasing the target band for its 0.0% 10 -year JGB policy (their yield curve control policy) from -25/+25 to -50/+50bp. Most observers expected such a move to come in April when the head of the BoJ, Haruhiko Kuroda, will retire.

This change in policy by the world’s last major central bank hold-out from dovish to hawkish helped push Treasury yields higher for the month.  Key benchmarks were mixed in December: the Bloomberg U.S. Intermediate Aggregate Index return was -0.26% while the Bloomberg Municipal Index return was 0.29% as heavy buying and low supply led to slightly positive performance.

By itself, Japan’s move may seem irrelevant, except that nothing is irrelevant when it comes to global interest rates.  The subtle shift led to a stronger yen and modestly more attractive yields for yen-based investors investing in U.S. Treasuries.  The longer-term implications of this shift could become more meaningful as the Fed and other central banks continue to raise rates in 2023.  The entire topic is a vivid reminder of just how global this fight against inflation is and how financial conditions can be impacted by myriad influences.

In terms of economic news during the month, there were signs of slowing in the manufacturing sector as the ISM Manufacturing survey dipped below 50 for the first time this cycle.  A reading below 50 indicates contractionary conditions.  Meanwhile, the Non-Manufacturing survey remains comfortably above 50, which is consistent with a return toward the pre-Covid economy that saw services driving much of the growth while manufacturing treads water.  The weaker reading from the manufacturing sector could also be a reflection of the strong dollar, which reduces the competitiveness of U.S. goods in overseas markets.

Inflation reports both here and abroad indicate a deceleration in the pace of inflation, which is a key reason for the continued inversion of the yield curve.  With the two-year Treasury yielding about 4.40% and the ten-year yielding about 3.80%, the bond market is pricing in a Fed pivot and betting that inflation will decline markedly.  Should the inflation measures stall out and prove stubborn in declining to the Fed’s target, the bond market would be vulnerable to repricing to higher yields.

Even after repeated Fed rate hikes and tighter financial conditions, employment reports show an overall robust labor market, with some decline in job openings but respectable wage gains.  There are a few signs that labor shortages are receding, but the resilience displayed thus far leads many to opine that any recession that does develop would be relatively shallow and short-lived.  If consumers feel confident in their employment prospects, they are less likely to curtail spending.  The difficulty many companies have had in attracting and keeping workers since the start of the pandemic may be one reason why some are reluctant to cut workers now, particularly skilled workers who remain scarce in certain industries and locales.

Given the strong likelihood of at least two additional rate hikes by the Fed in early 2023, combined with the growing persistence of certain elements of inflation, we believe the risks remain skewed toward higher bond yields in the near future.  This calls for patience and an opportunistic approach which is more palatable now that cash earns respectable yields once again.

From a sector perspective, December saw municipal bonds outperform thanks to robust demand and a low supply of new issues.  This supply-demand imbalance could persist since many investors are likely attracted to tax-exempt bonds again now that yields are substantially higher than they’ve been in years.  Corporate bond spreads moved a bit narrower in the month but could move wider should a full-blown recession develop, although we remain fairly sanguine about credit quality as the new year begins.  Mortgage-backed securities had decent results and appear to represent good value particularly since their prices are below par for most outstanding issues.

In summary, we recognize that investors may be unhappy that market values have declined on many of their bond holdings over the last year.  That said, higher yields are a healthy development for risk-averse investors whose primary objective is income.  Higher yields should also help slow the economy which may result in the soft landing that the Fed is seeking to help temper inflation.  Higher borrowing costs also bring a greater sense of financial discipline to the economy which is also, in our view, a welcome development after too much time with rates at the zero bound.  That low yield environment led to financial excesses and an “anything goes” mentality that has now mostly been deflated.

We wish you and yours more smiles and fewer frowns in 2023 or, said differently, a healthy, prosperous new year!

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.