Long-duration strategies were the top performers in fixed income for the year ended Dec. 31, according to Morningstar Inc.'s separate account/collective investment trust database.
Seven of the top 10 fixed-income strategies in the separate account universe were in Morningstar's long-duration bond categories, an abrupt change from the first three quarters of 2017 in which high-yield bonds dominated the one-year top 10 lists.
Emory Zink, fund analyst, fixed-income strategies at Morningstar in Chicago, said the long-duration end of the fixed-income yield curve remained relatively steady during the quarter ended Dec. 31 due to a variety of factors, including consistent demand for long-term bonds, pre-emptively priced-in rate hikes and persistently low inflation expectations.
Because good sector calls were key to outperformance, Ms. Zink said long-duration strategies that were overweight investment-grade corporate credit performed well for the year ended Dec. 31.
"There was enthusiasm in the markets and when tax reform passed, that emboldened the markets further. An investment-grade credit position did very well," she said.
Ms. Zink said high-yield corporate credit posted a positive return for the fourth quarter but the sector saw outflows compared to investment-grade during the fourth quarter as some investors questioned the future of higher-risk assets.
"Investors are asking how long this risk-on environment can continue. They're pulling back a little bit and you can see that in the difference between high yield and investment-grade credit," Ms. Zink said.
The median return for long-duration strategies in Morningstar's universe was 10.92% for the one-year period, while high yield returned a median 7.45% and the median return for Morningstar's entire domestic fixed-income universe was 3.93% for the year.
The Bloomberg Barclays U.S. Long-Duration Corporate Bond index returned 12.09% for the year ended Dec. 31, Barclays' U.S. Corporate High-Yield index returned 7.5% and the Bloomberg Barclays Aggregate Bond index returned 3.54% for the period.
Although the Federal Reserve has new leadership, with Jerome H. Powell succeeding Janet Yellen as chairman, Ms. Zink said fixed-income investors don't expect to see dramatic policy changes at the Fed. The process of balance-sheet normalization is expected to continue and investors still anticipate multiple interest-rate increases during 2018, she said.