Fixed Income

Fixed Income Commentary – July 2022

If you don’t like the weather, just wait a few minutes…

Bond yields rose again in June, although predominantly at the short end of the yield curve due to the close correlation with the federal funds rate.  The conclusion of the FOMC meeting on June 15 left us no surprises; the target fed funds rate was increased by 0.75% (75bps) to 1.50-1.75%. As a result, yields on Treasury Bills and Notes shorter than two years rose the most, while the yield on the two-year Treasury rose by 40bps and the ten-year by only 17bps.  The total return for the Bloomberg Barclays U.S. Intermediate Aggregate Bond Index was -1.27% for the month, while the Bloomberg Barclays Municipal Index returned -1.64%.

Day-to-day volatility in the financial markets has been higher as of late, which can be perceived as a reflection on investor’s sentiment. On the one side, you have an economy that is running hot and inflation is out of control, forcing the Fed to raise rates more than expected in order to bring inflation back down. On the other side, the narrative shifts to an economy that is slowing rapidly, inflation is peaking, and the Fed will bring rates down again in 2023.  The market seems to be ending the quarter with the latter view in mind since yields on most points along the yield curve have retreated from the intra-month highs set earlier in June:

– The high point in Treasury yields was June 14, the first day of the FOMC’s two-day meeting. 

– Yields on two-year, five-year, and ten-year Treasuries were 3.43%, 3.59%, and 3.48% respectively. 

– At month end, yields were 2.92%, 3.00%, and 2.97%, respectively.  That’s quite a move in two weeks and a great example of how sharp change can be when sentiment is so one-sided.

Scanning the various economic reports released in June, it appears many offered some degree of both strength and weakness.  A good example was the nonfarm payroll report from June 3: May payrolls gained more than expected — 390,000 jobs added compared to 318,000 expected — but the manufacturing component disappointed at 18,000 compared to 39,000 expected.  We don’t want to get too far into the weeds with economic minutia, but the point is that recession fears have mounted notwithstanding the continued strength in the headline data.  Other signs that economic activity is slowing include falling prices for many commodities (most notably copper), lower freight rates, and rising unwanted inventories at some retailers.

Yield spreads on risk sectors also continued to move wider in June based on these growing expectations of a recession on the horizon.  Corporate bonds, mortgage-backed securities, and municipal bonds all lagged Treasuries in their monthly results.  Due to the higher Treasury yields as well as the increasing uncertainty since the break-out of the Russia-Ukraine war, the issuance of corporate and municipal bonds has declined compared to last year.  While this decline in supply is helpful, it hasn’t been enough to offset the pace of mutual fund/ETF liquidations and the growing sense of unease due to the war, the inflation problem, and the shift in the Fed’s monetary policy stance.  All of this has weighed on valuations and pressured them lower relative to Treasuries.

Where do we go from here?  Now that Treasury yields have moved rapidly, we believe patience is needed to deploy new cash into the market.  We expect the poor sentiment on inflation and Fed tightening will result in Treasuries re-testing a move to higher yields sometime in the near future.  We do not subscribe to the view that Fed signals will turn dovish or rate hikes will pause any time soon simply because the inflation genie must be put back in the bottle.  Moreover, the slowing pace of growth has not been nearly enough yet to accomplish this.  We also believe the Fed is aware of its mistake last year and is willing to tolerate the risk of a mild recession in order to restore price stability.  The market fully expects the FOMC to raise short-term rates by another 75bps on July 27 and we expect the Committee to maintain its hawkish stance in any public statements.  Winning the war against inflation will require more time, more tough talk, and more actual evidence of lower inflation before any shift in sentiment on the part of the Fed can be contemplated. 

While we acknowledge that a recession is a real possibility in the next year, the credit fundamentals for much of the investment grade corporate market still appear solid, even if earnings turn lower.  The same can be said for much of the municipal market.  The federal transfers to the municipal sector resulted in many issuers boosting their rainy-day funds, reducing their underfunded pensions, and hardening their defenses for the next challenge.  Indeed, rating upgrade actions have outstripped downgrades during the past year.

One of the factors helping push yields higher is redemptions from mutual funds and ETFs.  There’s a circular, self-fulfilling element to redemptions: investors’ see higher yields pushing prices down, they get nervous and sell, which forces funds to sell, which pushes yields still higher, and so on.  Often, this kind of selling by the retail investor has proven ill-timed and highlights the inherent difficulty in market-timing as a dependable strategy.

Our final thought for the month is to consider declining prices and negative results of recent months as a buy signal rather than a reason to sell.  Resist the temptation to sell simply because negative total returns have occurred and do not attempt to predict the bottom in markets.  Investing requires committing capital and letting time work to your advantage, always with an eye on the long term.

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.