Once again, long-duration bonds continue to reign supreme among the best performing fixed-income strategies for the year ended June 30, accounting for all 10 of the top performers, according to Morningstar Inc.'s separate account/collective investment trust database.
Long-duration bonds also took all 10 spots for the year ended March 31.
Long-duration government bond strategies made up the top seven spots for the year ended June 30 as Treasury yields remained low. Taking up the other three spots on the top 10 were strategies dealing with municipal national long-duration bonds, inflation-protected bonds and long-term bonds.
"If the theme of Q1 was a flight to safety, in Q2 it was just about the opposite," said Gabriel Denis, analyst for fixed-income strategies at Morningstar in Chicago.
While COVID-19 led investors to seek safe assets such as U.S. Treasuries and agency mortgages in Q1, Mr. Denis said a combination of factors ranging from investor optimism in the development of coronavirus vaccine to the federal government's and Federal Reserve's "kitchen sink approach" to boost markets had investors seeking riskier assets such as investment-grade and high-yield corporate bonds in the second quarter.
"While safe-haven assets such as U.S. Treasuries and agency mortgages were the big winners of Q1, they underperformed this (past) quarter," Mr. Denis said. "There was a lot of activity with riskier assets, such as investment-grade corporates. High-yield corporates also had major positive returns."
Still, Mr. Denis pointed out that long government bond strategies still accounted for so many of the top 10 slots for the year ended June 30 because they performed so well in the first quarter and didn't lose money in the second quarter. And while riskier strategies like investing in corporate credit and emerging market debt outperformed in the second quarter, many of the strategies took such significant losses in Q1 that they still lagged their long government peers on a 12-month basis.
During the first quarter, the coronavirus caused Treasury yields to decline, investment-grade and high-yield credit spreads to widen and the stock market to plummet. Tension between Saudi Arabia and Russia also resulted in plummeting oil prices.
But with President Donald Trump signing the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act on March 27 and the Federal Reserve offering some aggressive monetary programs at the end of Q1, things took a turn. Markets rallied. Investment-grade and high-yield spreads tightened. And after Saudi Arabia and Russia called a truce and OPEC agreed to limit production in April, oil prices rose again.
The Bloomberg Barclays U.S. Long-Government Bond index returned 25.41% for the year ended June 30; the Bloomberg Barclays U.S. Aggregate Bond index had a one-year return of 8.74%; the Bloomberg Barclays Global Aggregate ex-U.S. Bond index returned 0.71% for the year; and the Bloomberg Barclays U.S. Long-Duration Corporate Bond index ended the quarter with a 13.79% return for the one-year period.
Mr. Denis also noted that most of the big bounce in the quarter came in April.
And while markets and oil prices rebounded, Treasury yields remained low over the course of the second quarter.
"Those actions by the Fed have led the market to acknowledge that Treasury interest rates are low and may stay low for an extended period," noted Joe Murphy, director of portfolio management at NISA Investment Advisors LLC in St. Louis.
Meanwhile, municipal bonds "took a bit longer to recover," according to Mr. Denis. He attributed this to there being more uncertainty within the muni market. "There are more factors to consider in a socially distant, locked down world," the Morningstar analyst said.
Looking forward, a lot is riding on how the recovery develops.
"We are not out of this pandemic," Mr. Denis said. "The big question is how is this pandemic recovery going to go, what levels of stimulus from the U.S. government are needed, and if a vaccine comes, how will it look?"
For the year ended June 30, the median return for long-duration domestic strategies in Morningstar's universe was 17.74% and the median return for Morningstar's entire domestic fixed-income universe was 5.47%.