One month into the New Year and we’ve already seen some interesting—some might even say unexpected—developments in the bond market. Before we get too far into 2018, I thought it would be a useful exercise to offer a final review of how the major fixed income asset classes fared for 2017, in a sense providing some frame of reference for this year’s possibilities.
Perhaps the biggest surprise was found yet again in the U.S. Treasury (UST) market, specifically toward the back end of the curve. After posting a modest red-ink figure of -0.14% in 2016 (utilizing the Citi 10-Year Treasury Benchmark On-the-Run Index), the UST 10-Year note rebounded to register a total return in the plus column of +2.13%, defying expectations in the process. Indeed, following the 2016 presidential election, the overwhelming sentiment was that this rate instrument would have to finish the year higher in yield, but instead it closed out nearly 30 basis points (bps) below consensus forecasts (the fourth year in a row this happened).
Around the globe, two other closely watched developed world bond markets (Germany and Japan) did not share the U.S. experience. To be sure, 10-year German bund yields actually rose last year, helping to produce a -0.81% shortfall, while in Japan the same maturity registered an essentially unchanged performance (German and Japan generic government 10-year yield indexes).
Total Returns
The U.S. corporate bond market came in on the plus side of the ledger, with both investment grade (IG)and high yield (HY) posting back-to-back positive readings for 2016 and 2017. The IG performance basically matched the prior year’s positive return (+6.42% vs +6.11%, according to the BloombergBarclays U.S. Aggregate Corporate Total Return Value Unhedged Index). The HY sector put in another robust showing (+7.50%), especially considering it was coming off an incredible total return of +17.13% (as measured by the Bloomberg Barclays U.S. Corporate High Yield Total Return Index Unhedged) in 2016.
