By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Investors hoping to get a Fed pivot on its rate policy were dealt a disappointment in August, as rates rose substantially across the yield curve. Short rates had risen in dramatic fashion throughout 2022 eventually creating an inverted yield curve. August’s activity revealed nearly parallel shifts across the curve resulting in a loss for the Bloomberg Barclays Aggregate index of -3.5%. On a year-to-date basis, the BB Agg is down >-11% through August. As a reminder, the worse annual return since 1982 for the index is -2.9% in 1994.

Based on the current strong employment picture with 315,000 jobs created, 5.2% annual wage growth, and a labor participation rate that grew 0.3% in August (62.4%), it is likely that the Federal Reserve needs to continue to aggressively elevate rates until it accomplishes its primary objective of reducing inflation. This action will continue to weigh on the performance of the US bond market. Fed Chairman Powell has admitted that the Fed’s policy will inflict pain on American families as the strong labor market needs to be tamed. In order to impact the labor market, US rates must rise substantially. Are fixed-income managers and their clients prepared?