Mid-Year Outlook: Fixed Income

Despite high volatility in the bond market during the first half of the year, what's surprising is how much didn't change.

It hasn't been an easy start to the year for bond investors. The Federal Reserve continued its aggressive pace of rate hikes; instability flared in the banking sector, requiring government intervention; and a tense battle over raising the debt ceiling led to heightened fears that the U.S. government might default. Not surprisingly, volatility in the bond market—which is a measure of the degree of uncertainty about the direction of interest rates—soared.

Bond Market Volatility was high during the first half of the year

Yet as we close the books on the first half of 2023, what stands out is how much didn't change. Short-term yields have pushed higher as the Fed tightened policy, but yields for Treasury securities maturing in two years or more are nearly unchanged.

Yields for Treasury securities maturing in two years are more are nearly unchanged

The yield curve remains inverted, but the spread between 2-year and 10-year Treasury yields has stabilized in a range after plunging to its deepest level in decades.

The 2-year 10-year yield curve is still inverted, but has stabilized

Despite all the turmoil in the market, year-to-date returns have been positive in nearly every sub-asset class of the fixed-income market. Short-term investments with low durations posted modest gains, while intermediate to long-term bonds benefited from higher starting coupons and a downward drift in yields.

Year-to-date returns have been positive so far this year