Fixed Income Update & Outlook- 1H23 Review & Outlook For 2H23
Inflation: Declining; breakeven anchored around 2%
Headline inflation in the US and Europe is trending downwards, according to July 2023 data releases, while the UK is a notable outlier
Meanwhile, Treasury Inflation-Protected Securities (TIPS) breakevens (across tenors) are anchored around 2%. This suggests that the US markets are pricing in an optimistic scenario, inflation will come back down to 2% in a couple of years. However, recently, 10Y was the highest since November 2022 at 4.1%, and 30Y reached a 9M high at 4.2%, indicating pressure on inflation
Nevertheless, TIPS look attractive in the current environment – the 30Y TIPS yield is near 2% for the first time in over a decade, up from -0.5% in 2020-21
Performance of the fixed income universe
As we revisit our views in January 2023, it feels as if an eternity has passed. 2023 had a turbulent start, filled with a number of significant macro and micro events such as bank failures in the US, the rescue of Credit Suisse by UBS and the debt ceiling drama. Despite this, the fixed income universe has fared well so far, with all instruments giving positive returns over 1H23 after a torrid 2022.