Chart of the week

Amid rising inflation, a fixed income gap grows

As U.S. inflation spikes and rates rise, fixed income returns have diverged. Our chart looks at the gap between core fixed income and credit.

November 12, 2021 | 2 minute read

Growth of $100,000 across fixed income asset classes

Source: Bloomberg Finance, L.P., as of November 10, 2021. High yield represented by the ICE BofAML U.S. High Yield Master II Index. Senior secured loans represented by the S&P/LSTA Leveraged Loan Index. Barclays Agg refers to the Bloomberg Barclays U.S. Aggregate Bond Index.

  • Following months of well-publicized debate about whether inflation is transitory or a new reality, October’s inflation print surprised the markets this week. The consumer price index reached a multi-decade high, grew faster and was notably more broad-based than expected.
  • The market reaction to the report was strong. Equities pulled back as investors have come to expect a more aggressive Federal Reserve while Treasury yields climbed across the yield curve, with shorter-dated Treasury yields rising more than longer-term yields.
  • However, Wednesday’s activity was perhaps an acceleration in the more gradual trend toward higher rates we’ve seen in recent months. The chart illustrates the growth of $100,000 across several fixed income asset classes amid this year’s rising rate environment. As it shows, core fixed income investments (represented by the Barclays Agg) have not fared well while credit markets (senior secured loans and high yield bonds) have both gradually marched higher.1
  • Importantly, this year’s returns across the credit markets have generally been consistent with other historical periods of rising rates. Specifically, duration-sensitive core fixed income has historically turned in negative returns while floating-rate senior secured loans and shorter-duration high yield bonds have continued to see steady, income-driven appreciation.
  • Each historical scenario in which rates rise has been different, of course, and today’s market presents a range of challenges. Given current macroeconomic conditions, however, investment mandates with the flexibility to reach into lower-duration asset classes may be particularly attractive.

  • Bloomberg Finance, L.P., as of November 10, 2021. High yield represented by the ICE BofAML U.S. High Yield Master II Index. Senior secured loans represented by the S&P/LSTA Leveraged Loan Index.

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