Through the first nine months of the year, the global fixed income markets continued to defy the odds. Indeed, year-to-date, a variety of bond arenas have posted visible positive performances, continuing the trend that investors have been accustomed to for almost two years now. The more important question is whether this past performance can be maintained in the months ahead, or is the global bond market rally finally running on empty?
The emerging market (EM) debt space continued in the top spot, experiencing the best performance in the fixed income universe through the third quarter and building on the positive momentum that was seen for 2016. To be sure, EM local debt has produced a total return of +14.28% (J.P. Morgan Government Bond Index – Emerging Markets Global Diversified Index), after posting nearly +10% for all of last year. Interestingly, EM local debt performance has improved with each passing three-month period in 2017, starting in Q1 at +6.50% and posting a +10.36% total return through Q2. Some of the key reasons behind this performance have been fundamental improvements in EM countries combined with a less hostile U.S. rate setting. Although the Federal Reserve (Fed) lifted rates in March and June, as well as announcing balance sheet normalization in September, U.S. Treasury (UST) 10-Year yields (as of this writing) have actually fallen this year, helping support the EM local debt arena accordingly.
Total Returns
The U.S. corporate bond market managed to come in on the plus side of the ledger as well through Q3, although in the case of high yield (HY,) the return has not lived up to last year’s experience. This should come as no surprise to fixed income investors, however, as calendar year 2016 represented a stellar display for both the investment-grade (IG) and HY sectors. To provide some perspective, as measured by the Barclays U.S. Corporate High-Yield Total Return Index Unhedged, HY produced a positive reading of 7.00% following a very robust increase of 17.13% in 2016. In the IG corporate market, according to the Barclays U.S. Aggregate Corporate Total Return Value Unhedged Index, the IG sector registered a gain of 5.18% after finishing 2016 with a positive performance of 6.11%.
