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1 All data is as of 31 December 2022 unless otherwise stated. Average yield to worst (YTW) for the Bloomberg indices over the past 10 years: Bloomberg U.S. Aggregate Bond Index: 2.4%; Bloomberg Global Aggregate Bond Index: 1.7%. YTW on 31 December 2022: BBG U.S. Agg: 4.7%; BBG Global Agg: 3.7%.
2 All else equal, with no change to interest rates or spreads in a given period, and no defaults, the yield is effectively the total return. Naturally, interest rates and risk spreads are not static: look no further than 2022 where U.S. Treasury rates rose 200-400 basis points (bps) and credit and mortgage-backed securities’ (MBS) risk premia soared.
3 The Bloomberg U.S. Aggregate Bond Index is a widely recognised, unmanaged index of U.S. dollar-denominated, investment-grade, taxable fixed income securities.
4 Yield to worst (YTW) is a measure of the lowest possible yield that can be received on a bond that fully operates within the terms of its contract without defaulting.
5 Yield premium refers to the difference in yield between a comparable-duration Treasury security and that of a non-Treasury (i.e., corporate bond or MBS).
6 Credit refers to corporate bonds and government-related securities.
7 The Bloomberg Global Aggregate Bond Index is a widely recognised, unmanaged index of multi-currency, investment-grade fixed income securities.
8 The S&P 500 Index is a market capitalisation-weighted index of 500 large-capitalisation stocks commonly used to represent the U.S. equity market.
9 Duration is a measure of a bond’s (or a bond portfolio’s) price sensitivity to changes in interest rates.
10 With the prevailing mortgage rate near multi-decade highs following the massive interest rate increase in 2022, nearly all existing mortgage holders lack incentive to refinance. Given this development, the fundamental risk in Agency MBS—convexity (i.e., duration variability driven by changes in prepayments)—has declined to very low levels.
11 Against equities, bonds have a 20-year correlation of 0.15, and volatility that is much lower, even within the backdrop of historic rate volatility within the past year. In 2022, the correlation between bonds and equities spiked to 0.66.