Chart of the week

The Agg completes its worst-ever start to a year

Halfway through 2022, this week’s chart revisits the Agg’s monthly returns as expected rate volatility spikes.

July 1, 2022 | 2 minute read

Agg return by month and expected Treasury volatility

Source: Bloomberg Finance, L.P., FS Investments, as of June 30, 2022. MOVE refers to the ICE BofAML U.S. Bond Market Option Volatility Estimate (MOVE) Index.

  • Long-term inflation expectations have moderated a bit recently, perhaps a sign that increasingly hawkish Fed rhetoric has been effective. This week, Fed Chair Powell said he was more concerned about inflation than a potential U.S. recession. The Cleveland and San Francisco Fed presidents signed on as well, recently reiterating their comfort with further aggressive rate hikes.
  • Against this backdrop, the Market Option Volatility Estimate (MOVE) Index, which measures market expectations for volatility within the Treasury market (black line), spiked in June. Fed policy has the greatest impact on the short end of the yield curve, yet rates across the curve also remain elevated.
  • The higher rate environment has had a grave impact on core fixed income investments and, for that matter, virtually all duration-sensitive investments this year as correlations across equity and fixed income markets have risen meaningfully.
  • As the chart shows, the Agg has generated negative returns in all but one month in 2022 and, at -10.7% YTD, just completed its worst-ever first half of a year.1 Importantly, the forward-looking environment doesn’t appear to be much kinder.
  • With policymakers clear on their desire to stamp out inflation via aggressive rate hikes, core fixed income could remain under pressure. Investors would be wise to seek alternatives that have an ability to generate income and total return potential even within such an environment.

  • Bloomberg Finance, L.P., FS Investments, as of June 30, 2022.

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