January 2023 Market Review

U.S. Treasury prices climbed in January as foreign and domestic investors took advantage of attractive all-in yields offered in fixed income. The 2-year/10-year curve inverted further to -70 basis points (bps) and the 10-year U.S. Treasury yield closed at 3.54%. TIPS performance was flat verse nominals, as headline CPI data came in with the first negative month-over-month print since 2020.

The December jobs data released early in the month showed wage growth slowed to 4.6%. This significant decline in growth indicates the Fed’s restrictive policy is beginning to bear fruit, despite the unemployment rate falling to the lowest level in decades. The employment data led to a roughly 15 bps drop in interest rates as markets speculated an end of the Fed tightening cycle.

Janet Yellen submitted a letter to congressional leadership urging the use of extraordinary measures to fund the legal obligations of the U.S. and emphasized the need to quickly suspend the debt limit. While a U.S. default remains unlikely, the continuation of the debt-ceiling debate could result in further rate volatility as investors hedge the risk of a U.S. rating downgrade and potential for a softening dollar.

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