Aperture Emerging Debt Opportunities: Commentary for Q4 2023 

2023: A Bond Year to Remember

When financial history books are written, 2023 will be marked by unprecedented events, dramatic shifts in policy, and unexpected outcomes – including a late 4Q rally in most financial asset classes. Investors in Emerging Markets, which have prospered from three decades of US rate declines and China’s meteoric economic rise, were forced to strap their seatbelts and hold on for a twisty ride. 

2023 may remembered as “The End of the Easy Money Era.” Central banks, particularly the US Federal Reserve, aggressively tightened monetary policy to combat inflation reaching multi-decade highs. Interest rates soared with the markets misreading inflation. Some of this misread was due to a new American industrial policy shift and unprecedented, targeted stimulus that led to a strong job market and resilient demand. 

The nervousness over rates led to unprecedented volatility for 2-year US Treasury bonds, hitting a record 16% in October – a stark contrast to the previous decade. The US Fed interest rates hikes that began in early 2022 took its toll early in 2023. Two notable banks - Silicon Valley Bank and Credit Suisse – required rescues, showcasing the fragility of major players in a volatile environment. After a period of calm, bond investors were dealt another surprise on August 1st: Moody's downgraded the US sovereign credit rating from AAA, citing growing debt levels and political polarization in America. This move, while largely symbolic, raised questions over the country's long-held status as a financial safe haven and led to a sharp sell-off that ran through October.
 

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