After a few quarters of turbulence, economic conditions are improving for fixed income according to an article by Principal Financial Group. Essentially, the Fed is succeeding in realizing its mandate as inflation and economic growth are moderating.

This means that the Fed’s hiking cycle is most likely in its final innings. Already, we are seeing longer-term rates bending lower in anticipation which is providing support to the asset class. Although there is the potential for more short-term volatility, the softening of economic and inflation data means that the longer-term trend is higher.

The first quarter of 2023 featured mild softness in inflation and the labor market, while economic growth came in better than expected. In the second quarter, economic data is likely to soften which increases the odds of the Fed pausing. 

Additionally, the Fed’s rapid tightening over the past year has not been felt in the economy. As these effects become more evident, fixed income will outperform and reward investors willing to sit through near-term volatility. 

Finsum: Fixed income performed well in the first quarter, but economic conditions continue to develop in favor of the asset class.