THE OUTLOOK FOR FIXED INCOME HAS BRIGHTENED

2022 was a challenging year for the bond market, with heightened inflation in the aftermath of the pandemic forcing U.S. Federal Reserve (Fed) policymakers to aggressively tighten monetary policy. The U.S. Treasury yield curve rose across all tenors in 2022, while inverting during the second half of the year. Cash was the best performing asset class, with short duration bond strategies significantly outperforming longer duration strategies. The Bloomberg U.S. Treasury 1-3 Year Index returned -3.8% in 2022, for example, while the Bloomberg U.S. Treasury Long Index returned -29.3%. Intermediate duration strategies were between these extremes, with the Bloomberg U.S. Aggregate Index returning -13.0% during the year.

Inflation continues to be a serious issue confronting the financial markets, but recent data point to improvement. The 2-year inflation breakeven rate (roughly what bond investors expect inflation to be during the coming two years) was 2.31% at the end of December, much lower than recently reported U.S. Consumer Price Index data

(which look backward) and near the Fed’s long-term 2.0% inflation target. Longer-term inflation expectations are also down, with the 10-year inflation breakeven rate 2.30% at the end of December.

Supply constraints remain an important issue impacting inflation across the world, but the situation