Citi Global Wealth PUTTiNG YoUr CASH To worK iN A HiGHer rATe eNviroNMeNT | | 34 Investments Yesterday’s bad news may be today’s FiGUre 1. FeD FUNDS rATe iMPLieD BY eUroDoLLAr FUTUreS opportunity. US dollar-denominated fixed income suffered its worst total return in many 6.0 decades in 2022. As of 22 November 2022, the Eurodollar Bloomberg US Aggregate Index total return for December yield the year was negative 13.3%, with sub-indices 2022 representing US investment-grade debt negative 5.0 2023 by 16.1%, US high yield shedding 11.2% and the US dollar-denominated emerging markets debt 2024 index 17.6% lower. Even US Treasury Inflation Protected Securities (TIPS) were down 12%. 4.0 In sum, fixed income investors had nowhere to hide. What caused the selloff? From a starting level ) % 3.0 ( of almost 0%, the Fed has raised its policy rates d 375 basis points (bps) in an effort to choke off l e i stubbornly high inflation, as of 3 November Y 2022. The market expects a bit more to come, 2.0 with the Fed funds rate seen ending 2022 at 4.5%. Potential additional hikes in 2023 would take the terminal rate – the peak of the rate- hiking cycle – to about 5.0%. 1.0 Unlike the Fed, the market has priced in a very brief stay at the terminal rate in 2023, followed by at least one rate cut by the end of 2023 – FIGURE 1. We believe the impact of 0.0 higher rates will hurt global economic growth May 21 Jul 21 Sep 21 Jul 21 Jan 22 Mar 22 May 22 Jul 22 Jul 22 Nov 22 as more cashflow goes to servicing debt, while also raising US unemployment as discretionary spending falls and sectors such as housing see a collapse in demand and construction. Source: Bloomberg, as of 21 Nov 2022. All forecasts are expressions of opinion, are subject to change without notice and are not intended to be a guarantee of future events. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. Chart shows the Fed funds rates for periods ahead as implied by Eurodollar futures contracts.