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Fixed Income Monthly - October 2023

The Fixed Income Monthly provides a forward-looking summary of the medium-term views from the Fidelity Fixed Income team.


Yields continued to rise in September with US 10y Treasuries now edging over 4.8%, a rise of 70bps since the end of August. The bond market has been pushing out expectations of a Fed pivot since the banking crisis in March and increasing its estimate of the terminal rate. The market is now pricing the Fed to hold rates at 5.5% (with a roughly even chance of one final hike in November) until mid-2024. Thereafter, modest cuts of around 75bps are expected to the end of 2024. The pivot is still a long way off.

At the September FOMC meeting, the Fed raised its forecast for interest rates next year, emphasised its focus on a soft landing and reiterated its commitment to maintaining higher rates to bring inflation to target. The market has largely bought into the Fed’s higher for longer narrative and is demanding greater term premium.

Fiscal policy is also contributing to the rise in yields. Following the debt ceiling agreement in June, there has been a substantial rise in the US fiscal deficit. The deficit is running at around $1.5 trillion or 8.5% of GDP and is expected to be $1.6 trillion next year. That means public debt will continue to rise, having already breached $33 trillion or 123% of GDP in June. To plug the deficit, gross Treasury supply in 2024 will need to rise by around $700 billion (in 10y bond equivalents) to over $3 trillion. That’s a huge wave of government bond issuance for the market to soak up. 

This combination of growing Treasury supply, rising interest rate term premium and the pricing of higher terminal rates are conspiring to push yields higher. But this is not a sustainable dynamic. High debt and high interest rates put a strain on the economy just as many corporates face a debt maturity wall where they are scheduled to roll over debt over the next few years. Global liquidity is declining, corporate leverage is rising and monthly US bankruptcies among small companies has leapt higher this year.

If these conditions continue, the stress in the economy could become so pronounced that despite the Fed’s commitment to higher rates, the economic reality of a hard landing could force it to reverse course, even if inflation remains above target. 

Historically, the most profitable long-term point to invest in duration is when the Fed stops raising rates. With bond yields now exceeding the earnings yield on large cap US stocks, this could be a rare opportunity to lock in attractive yields and be exposed to recovering bond prices.

Steve Ellis
Global CIO Fixed Income

Strategy summary
Summary of returns as of 30 September 2023 (%)
Macro and Rates Overview
Inflation-Linked Bonds
Investment Grade Credit
High Yield
Emerging Markets
Market Data


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The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future results.

Bond investments: The price of bonds is influenced by movements in interest rates, changes in the credit rating of bond issuers, and other factors such as inflation and market dynamics. In general, as interest rates rise the price of a bond will fall.  The risk of default is based on the issuer's ability to make interest payments and to repay the loan at maturity.  Default risk may, therefore, vary between different government issuers as well as between different corporate issuers.

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