Graphic: U.S. bond investors’ rough year
The Federal Reserve has moved aggressively to rein in inflation by raising short-term interest rates and allowing longer-term Treasuries and mortgage-backed securities to roll off the balance sheet. The current economic environment and the Fed’s actions have resulted in higher Treasury yields across the board, hurting U.S. bond returns. But if inflation subsides, certain fixed-income sectors could bounce back after a tough 2022.
Record losses: The Bloomberg U.S. Aggregate Bond index lost 12.3% through Sept. 15, after a 1.5% loss in 2021. If this year's return holds, it would be the worst performance in its history. The index, with a 6.3 option-adjusted duration vs. about 5 a decade ago, has higher interest-rate risk.
Returns and duration
Corporates drag: Investment-grade corporate bonds, measured by the Bloomberg U.S. Corporate Bond index, have had the worst returns this year, falling by 15.6%. U.S. Treasuries, with a -11.4% return, were the next worst.
Year-to-date index returns
Outflows: Separate accounts experienced $7.9 billion in net outflows in the intermediate core bond category for the second quarter. Meanwhile, collective investment trusts saw $790 million in net outflows in that category during the most recent quarter, coming after more than $120 million in outflows the previous period.
Intermediate core bond flows (billions)
Yields up: Treasury yields have spiked. The 2-year yield is 3.87%, 309 basis points higher than January, and the 10-year yield has more than doubled to 3.45%. However, economists predict falling yields over the next few years, with the 2-year dropping to 2.80% and the 10-year to 3.03% by year-end 2024. This likely assumes success in curtailing inflation.
Treasury yield curve
*Forecast. Sources: Bloomberg LP, Morningstar Inc., U.S. Department of the Treasury
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