January 2023 Commentary
Markets were off to a buoyant start in 2023, as the S&P 500® rallied 6.18% for the month, one of its strongest January returns in recent years. This was accompanied by a “less hawkish” tone from the U.S. Federal Reserve as inflation numbers eased. After the meeting on Jan. 31-Feb. 1, 2023, the Federal Open Market Committee (FOMC) announced a more conservative interest rate rise of 25 bps.
As investors continued to speculate on the likelihood of a recession in the U.S., Europe and the U.K. this year, there was more agreement among market participants that numerous significant rate hikes may be a thing of the past (at least for now). As interest rates begin to stabilize, U.S. Treasuries—as represented by the iBoxx $ Treasuries—gained 2.81%, offering a yield of 3.75% at the end of January.
In Asia, markets were also optimistic that China’s reopening will spur market activities, which would especially benefit tourism-reliant economies that depend heavily on Chinese travelers. With the potential easing of shipping routes and resumption of supply chain normalcy, global trade may benefit from the reopening of the world’s second-largest economy.
As shown in Exhibit 1, after falling 10.43% in 2022, January posted a healthy 3.18% return. The index yield fell 0.63 percentage points to 5.74% and the index spread narrowed by 27 bps to 199 bps.
High yield bonds returned close to 7% and investment grade bonds posted 2.56%. On a rolling one-year basis, all indices were still in negative territory, with China LGFVs being the closest to breaking even.
