August 2023 Monthly Recap
Market Snapshot
*As of 08/31/2023
By the Numbers
  • The U.S. Aggregate bond index has gained 1.37% this year, down from a peak return of 4.2% in April.
  • Corporate bond returns have receded to 2.76% from 5% prior to the banking crisis earlier this year.
  • A diversified index of bonds now yields 4.33% – the average is 2.6% since 2009. In contrast, the forward-looking dividend yield on the S&P 500 is now only 1.54% after this year’s strong rally.

Rising yields mean that bonds are able to generate more portfolio income than at any other time over the past 15 years. What do long-term investors need to know about recent swings in the bond market and how it affects their portfolios?

While 2023 has been a better year for bonds after last year’s bear market, rising interest rates over the past three months have acted as a headwind. Several market and economic factors have created uncertainty in the bond market. First, recent events have led to swings in interest rates beginning with the U.S. debt downgrade by Fitch Ratings on August 1. This jump in rates had ripple effects across the market since U.S. Treasury securities serve as a benchmark for riskier bonds. However, just a week later, Moody’s downgraded 10 banks, placed six under review, and shifted the outlooks on 11 to negative. These ratings and outlook changes briefly renewed concerns over the financial system which caused interest rates to fall. Since then, there have been concerns around the supply and demand of Treasury securities, worries over China’s housing sector, and more.

All told, these events caused large intra-day rate swings in August. This volatility directly impacts bonds since prices and interest rates are two sides of the same coin. In general, rising interest rates lead to lower bond prices, and vice versa. One intuitive way to understand this is that the cheaper you can buy a bond with a specified payout schedule, the higher your eventual return, or yield, will be.

Despite these changes in rates and bond prices, it’s important to maintain perspective on the bond market behavior of the past two years. Last year’s historic surge in inflation resulted in the worst bear market for bonds in recent history. This year, bond returns have mostly been positive, and the largest intra-year decline of 4% is well in-line with historical patterns since most years experience similar declines between 2% and 5%. So, while bond prices are generally much steadier than those of stocks, history shows that fluctuating interest rates result in some bond market swings each year.

Second, while the Fed is expected to keep policy rates high, there is less pressure to hike rates again as inflation improves. The latest Consumer Price Index report shows that price pressures are not only easing, but that headline inflation is already back to the Fed’s 2% target when considering the latest annualized rate. Core CPI is also just under the target at 1.9% on an annualized basis and the trend is deflationary when shelter costs are also excluded. These numbers are important because they represent what is happening to consumer prices today, compared to the more commonly cited year-over-year measures that tend to be more backward-looking.

So, while the Fed has penciled in one more rate hike this year, markets believe this may not be necessary. The probability of a so-called “soft landing” has increased as economic growth has remained steady as well. This has helped to reduce credit risk concerns which were elevated during the banking crisis. Yields on riskier bonds have come down as recession concerns have faded and corporate earnings have beaten low expectations. Ironically, only the yields on the highest rated bonds have increased due to the U.S. debt downgrade. All in all, this means that even if a recession does occur, markets expect that it would be mild and that companies would still be well-positioned to repay their debts.

Finally, investors can be better positioned to generate portfolio income today, without “reaching for yield” by taking inappropriate risks, than at any point since the global financial crisis. A diversified index of bonds now yields 4.33% – the average is 2.6% since 2009. In contrast, the forward-looking dividend yield on the S&P 500 is now only 1.54% after this year’s strong rally. This is further evidence that diversifying across stocks and bonds continues to be the best way to construct well-balanced portfolios that can achieve income and growth, while withstanding different market environments.

Bonds are offering attractive yields for long-term investors.

Sources: Clearnomics, Bloomberg
© 2023 Clearnomics, Inc

The views expressed represent the opinions of Tiller Private Wealth as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.

The Dow Jones Industrial Average is an unmanaged, price-weighted index of 30 blue-chip stocks. You cannot directly invest in this index.

The NASDAQ Composite Index is an unmanaged, market-weighted index of all over the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in this index.

The MSCI EAFE Index (Europe, Australasia, Far East) is designed to measure the equity market performance of developed markets outside of the U.S. and Canada.

The Bloomberg US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

Data sources: YCharts, US Treasury Dept., and