Fixed Income

Fixed Income Commentary – July 2023

Vim and Vigor

Bond yields rose in June as economic data continued to demonstrate more vigor than expected, particularly the 3rd revision of first quarter GDP.  Combined with only sluggish declines in most inflation measures, this data provided the rationale for Fed Chair Powell to reiterate that more rate hikes will likely be needed to bring inflation into line.  Finally, it seems the bond market is listening and now pricing in a greater likelihood of such a development.  All of this led to a bit of a mixed bag: declines on most taxable bond indices — the total return for the Bloomberg U.S. Intermediate Aggregate Index was -0.60% — but a modest gain of 1.00% for the Bloomberg Municipal Index.

After using the word “resilient” repetitively to describe economic performance, we finally switched to vigor this month.  The recession that some have been expecting since early last year when the Fed first began to hike rates is still nowhere to be seen.   There are signs of slowing momentum in some areas of the economy along with changes in the financial underpinnings of assets and businesses that may inhibit loans from being extended or renewed.  Additional Fed rate hikes will likely exacerbate these trends and therefore we do still expect a recession to develop, but we maintain it will likely be mild and relatively short-lived.

One of the most surprising areas where growth has surpassed market expectations is residential real estate.  Mortgage rates are substantially higher than they were a year ago and were last in this range in the year 2000, but perhaps the acute lack of supply has finally convinced those on the sidelines to capitulate rather than wait for market conditions to change.  Indeed, anyone holding a sub-3.5% mortgage is unlikely to sell their home unless there are compelling reasons to do so, which may leave the market in a short supply position for quite some time.  Meanwhile, it remains challenging for builders to plan large developments in many parts of the country due to water shortages, zoning, and labor supply shortages.

In terms of sector performance, corporate bond spreads have been narrowing in recent weeks which led to modestly better performance compared to like-duration Treasuries.  Mortgage-backed securities (MBS) have not been participating in this trend and we believe offer good value at current trading levels.  Even good old Treasuries are attractive, particularly short issues inside three years.  Municipal bonds were the star performers in June, benefiting from light supply of new issues, decent fundamental credit metrics, and robust demand from investors looking for tax-exempt income.

In closing, the higher yields now prevailing in the bond market offer a compelling opportunity for investors to obtain solid income streams for the first time in years.  Do not look to the bond portion of your portfolio for capital gains, but rather let it do what it does best: deliver reliable income over time.  Now on to the second half of the year when hopefully the fireworks will be behind us.

Note: We are in the process of revamping this monthly piece.  The new format we are developing will include comments on both fixed income and equity markets, likely in a shorter bullet-point style.

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.