The Federal Market Open Committee (FOMC) raised its policy rate by a total of 125 basis points (bps) in the past quarter, 75 bps in November and 50 bps in December. Consumer price inflation peaked in June at 9% and by November the rate of inflation had slowed to 7.1% as energy prices moderated and supply bottlenecks eased. However, inflation remains uncomfortably high relative to the US Federal Reserve (Fed)’s 2% objective.

While the markets had ‘hoped’ for a pause in the pace of tightening, given the normal lags with which policy impacts the economy, the data have been robust with only the housing and real estate sector performing below expectations. The Bank of England (BoE) and European Central Bank (ECB) matched the Fed’s rate moves as they too delivered 125 bps of rate hikes. The aggressive actions by the ECB helped the euro recover from 0.95 against the US dollar to end the quarter at 1.07 for a 9.2% gain.

Given the more aggressive rate moves by the Fed for 2022 as a whole, the US dollar strengthened against most major currencies with the dollar index gaining 8.2% for the year. Developed market sovereign bonds had one of their worst years on record. The Bloomberg US Aggregate Total Return Index retracted by 12.9%. European sovereign bonds fared far worse with UK Gilts declining 25% and German Bunds lost 17.9% Locally, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) delivered its third consecutive 75-bps hike, taking the repo rate to 7%.

The FTSE/JSE All Bond Index (ALBI) returned 5.65% for the quarter as the yield curve shifted lower in November, supported by increased risk appetite, a rally in global bond yields and a weaker US dollar. Despite the good fourth-quarter returns, both nominal bonds and inflation-linked bonds (ILBs) underperformed cash. The Alexander Forbes Short-Term Fixed Interest (STeFi) Composite Index returned 5.2% for the year while the ALBI and FTSE/JSE Inflation-Linked (CILI) indices returned 4.2%.