September 2022 Commentary
Volatility in financial markets amplified in September. The S&P 500® (-9.34%) had its worst month since March 2020, and U.S. Treasuries saw large drawdowns, with the 2-year and 10-year yields topping 4.30% and 3.97%, respectively.
The fight against inflation intensified, as global central banks coordinated policy responses to raising benchmark rates. In the U.S., the five-year breakeven inflation rate declined steadily, suggesting inflation expectations may be moderating. However, the combination of rising rates and a persistently inverted yield curve brought a renewed focus on a recession narrative.
Across the Atlantic, the new fiscal stimulus plan announced recently by the U.K. government rattled financial markets. The proposed fresh spending and tax cut raised concerns over the country's higher funding costs, which later sent bond yields higher globally. Meanwhile, the greenback, which is typically regarded as a safe-haven currency for investors in periods of uncertainty, moved up 3.15% this month.
With U.S. yields rising rapidly to high levels in September, Asian USD bonds recorded yet another month of negative performance. As shown in Exhibit 1, the iBoxx USD Asia ex-Japan Index fell 3.43%, as all other major subindices of the overall index moved largely lower.
Moreover, the overall index yield rose 92 bps to 6.74%, and the overall index spread widened 28 bps to 272 bps.
This month, the investment grade (IG) and high yield (HY) subindices both sank into negative territory, though the IG subindex outperformed the HY by a wide margin (196 bps). In the IG and HY segments, losses were generally seen across the curve, with long-end maturity buckets logging the largest casualties. Notably, the HY subindex yield surged by 3 percentage points, and the spread widened by 227 bps.
