High-yield bond strategies led the list of top fixed-income performers for the second consecutive quarter, taking seven of the top 10 spots for the year ended June 30, according to Morningstar Inc.'s separate account/collective investment trust database.
Emory Zink, fund analyst, fixed-income strategies at Morningstar in Chicago, said strong relative returns for high yield, which outperformed investment-grade corporates by roughly 2 percentage points, were only part of a very busy second-quarter fixed-income story.
In addition to the outperformance of lower-tiered corporate credit segments, the environment also favored managers of core-plus strategies that had exposure to asset-backed securities, with auto loans and other consumer debt continuing to produce compelling returns during the second quarter, she said.
While the Treasury yield curve flattened further, Ms. Zink said "the longest end slightly dipped, generating a 0.31% return that outpaced the more modest 0.1% of the broader U.S. Treasury index over the quarter."
Outside of the U.S. fixed-income markets, she said, "a strengthening dollar put pressure on non-U.S. dollar denominated holdings, resulting in challenges for foreign-currency denominated bonds. The unhedged (Bloomberg Barclays') Global Aggregate Bond index lost 2.78% for the quarter, while the (JP Morgan) Emerging Markets Local-currency index plummeted 10.42%."
Central bank watchers saw Chairman Jerome H. Powell continue as a steady hand at the Federal Reserve during the quarter, raising rates a quarter-point in June, while the European Central Bank discussed slowing its quantitative easing program. Global events such as U.S. sanctions on Russia and President Donald Trump's decision to impose tariffs on U.S. imports of steel and aluminum contributed to uncertainty around the future economic outlook for domestic fixed income, Ms. Zink said.
"All of this happened during the second quarter," she said.
The median return for domestic high-yield strategies in Morningstar's universe was 2.64% for the one-year period, while the median return for Morningstar's entire domestic fixed-income universe was 0.37%.
The Bloomberg Barclays U.S. Corporate High-Yield index returned 2.62% for the year ended June 30 and the Bloomberg Barclays U.S. Aggregate Bond index returned -0.4%.