Perspectives

December 2022 Review

Fixed income markets were slightly weaker in December. Rates initially rallied on signs of a downshift in inflation and labor costs, but bounced following a hawkish FOMC meeting. The labor market and consumer sectors remained resilient, even as housing activity continued to trend lower.

Fed

The FOMC hiked the overnight rate by 50 basis points for the month of December, and increased projections that rates will end 2023 up 50 basis points at 5.125% (Chart 1). The futures market registered little change in response, pricing in a terminal rate of 5% in June and then two cuts through year end.

Interest Rates

Rates across the curve rose sharply as central banks around the world pursued tighter financial conditions. Short rates rose on unexpectedly hawkish rhetoric from the Fed, while longer rates were lifted by a jump in real yields.

Credit

Investment-grade credit spreads were marginally tighter and closed at their lowest levels since April amid a typical seasonal lull in activity (Chart 2). High-yield spreads widened only slightly and were largely immune to the volatility in the stock market as, here too, the primary market was effectively closed (Chart 3).

MBS

Mortgage-backed securities outperformed similar duration Treasuries amid the selloff in rates. The sector benefited from a positive technical environment with origination continuing to fall and overseas demand increasing. Rate volatility was relatively benign, contributing to the stability in spreads (Chart 4).