Posted by lplresearch
Economic Blog
1/5/2021
US investment-grade bonds had a solid 2020 despite a tumultuous year overall. The broad Bloomberg Barclays US Aggregate Bond Index had a total return of 7.5%—not as strong as 2019’s 8.7% but its fifth-best year in the last 20 and the best two-year stretch since 2001–02.
“It was another good year for bonds in 2020, and some of the highest-quality areas of the bond market performed the best,” said LPL Financial Chief Market Strategist Ryan Detrick. “But like stocks, it was really the tale of two 2020s—before and after March 23.”
As shown in the LPL Chart of the Day, by the time 2020 wrapped up, there wasn’t a whole lot of dispersion among major segments of the bond market—but for riskier credit-sensitive bonds in particular, the path to getting there was a roller-coaster ride.
In general, more interest-rate sensitive sectors, such as Treasuries, Treasury Inflation-Protected Securities (TIPS), and investment-grade corporates were among the sector leaders for the year.
Despite the large bounce back by some of the most credit-sensitive bond sectors, such as emerging market debt, bank loans, high-yield corporates, and preferreds, the bond sectors didn’t match the rebound in the S&P 500 Index. At the same time, for income-oriented investors, these higher-yielding sectors did offer advances in 2020 while still providing an attractive yield.
Treasuries saw only a slight advance after March 23, 2020, but their performance over the first half of the year highlighted their potential value as a portfolio diversifier.
We do not expect 2021 to look like 2020. Treasury yields have started the year significantly lower than in 2020 and may rise as the economy continues to turn around and inflation normalizes or even starts to run a little hot. Based on these factors, we have a year-end 2021 forecast range of 1.25–1.75% for the 10-year Treasury yield. If we hit this range, it would create a headwind for rate-sensitive areas of the bond market. (Bond prices fall when their yields rise.) High-quality bonds are likely to continue to provide some downside protection if the stock market becomes volatile again, but after two consecutive years of solid returns, bond investors may need to lower their expectations.
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