In this week's report, we delve into the intriguing dynamics of the US yield curve. A comforting US Producer Price Index (PPI) countering a slight rise in the Consumer Price Index (CPI) has pushed the US 2-year yield to its lowest since May 2023, while long-term interest rates demonstrate stability.

2024's first week veered from 2023's end-of-year bond rally to a sharp sell-off, as widening spreads and rising rates introduced a sobering start. This correction, following the potent rally since mid-October, alongside primary market activities pressuring spreads and rates, underscores the inherent volatility in fixed income markets and sets a cautious tone for January.

The Bloomberg Global Aggregate Index, a barometer for the global fixed income market, has recorded its largest two-month gain ever, marking a significant turnaround. This rally concludes a challenging period, bringing a much-needed positive annual performance close to +6% after two consecutive years of declines.

The journey through 2023 was an unexpected odyssey for fixed income markets, marked by challenges but ultimately culminating in positive performance after two negative years. Despite unchanged U.S. rates throughout the year, carry emerged as the pivotal component driving returns in rate strategies.

The Federal Reserve's latest meeting signaled an anticipated 75 bp rate cut in 2024, driving the 10-year US Treasury yield below 4% from a recent 5% high. While markets have welcomed this dovish turn, it raises concerns about potentially reigniting inflationary pressures.

In December, bond indexes are once again on the rise, extending the exceptional performance seen in November, despite a solid U.S. job report. While the end of the year seems to be proceeding smoothly, certain market events, such as the potential conclusion of the BOJ's negative interest rate policy, remain firmly in focus for 2024.

In November 2023, Global Aggregate bonds achieved their second-best performance in three decades, driven by lower growth expectations and reduced inflation. However, this outstanding performance is not without challenges, including persistent rate volatility, a deeply inverted yield curve, and a term premium in negative territory.

The past week in fixed income was marked by a notable reduction in volatility, attributed in part to the Thanksgiving break. While rates experienced a modest uptick, the high beta credit (including CoCo bonds) segment emerged as an outperformer.

Fixed income investments thrived this week, benefiting from the perfect cocktail of a larger-than-expected decline in US inflation and a significant deterioration in the job market, marked by higher-than-anticipated US initial jobless claims.

The US fixed income market witnessed some volatility this week, fueled by both supply factors and comments from the Fed. The US Treasuries yield curve concluded the week flatter by 15bps, indicating that the fight against inflation is still not ”close” to being done!