Yields rose significantly across the term structure. The 2-year U.S. Treasury yield climbed 60 basis points, from 3.64% to 4.24%, as longer-dated Treasury yields pushed toward 5%. The 10-year Treasury increased by 79 basis points, while the 30-year rose by 66 basis points, ending at yields of 4.57% and 4.78%, respectively.

Importantly, the deceleration in inflation metrics stalled. The most recent CPI reading of 2.7% was up from 2.4% at the end of the third quarter. Using the Fed’s preferred measure of inflation, PCE, the November print of 2.82% marked the highest reading since April and was up from 2.66% at the end of the third quarter. While not an alarming rise, it gives the Federal Reserve additional incentive to reduce the pace of their easing.

Investment-grade companies benefitted from a strong underlying macro backdrop and robust corporate earnings. Despite looming risks such as a potential recession and political uncertainties, credit spreads—which measure the difference between corporate bond yields and Treasury yields—reached their tightest levels in nearly two decades. However, potential risks from inflation and fiscal policy remain concerns for market participants, raising questions about the sustainability of such narrow spreads.

During the quarter, the relative value offered by securitized products continued to grow as the agency-MBS basis widened by 13 basis points to end the quarter at 130 basis points—an attractive entry point. Overall, 2024 proved to be another difficult year for bonds, with benchmark indices delivering modest returns amid significant volatility. Despite the challenges, elevated starting yields in the bond market present attractive opportunities for investors looking to diversify portfolios and hedge against future economic uncertainties.