Credit: Shutterstock photoSpecial Report:Best Mutual Funds 2015, January Performance Report
U .S. Treasury bonds once again skyrocketed in January on the back of macroeconomic and geopolitical news that sent investors looking for safety.
The clear winners were longer-duration U.S. Treasury mutual funds , which soared 4.90% as a result of increased foreign buying in the search for more yield, according to preliminary data from Lipper, a provider of mutual fund information.
"If you were long, high quality, you did well," said Jennifer Vail, head of fixed income at U.S. Bank Wealth Management. "That makes sense, given the little to no upward pressure on yields on the long-end of the curve."
Longer-term investment grade bonds also scored highly, with A- and BBB-rated mutual funds surging 2.74% and 2.64% respectively.
Financial Seen Outperforming
For corporate credit this year, Vail expects financials to outperform utilities and industrials, mostly due to the loosening of the margin compression as the Fed raises rates.
Short and intermediate term U.S. government and Treasury funds rose 1.73%, while investment-grade funds of similar duration advanced 0.94%. High-yield bond funds continued to suffer on the back of falling oil prices, though they ended the month on a slight positive with a 0.29% gain.
Meanwhile, the U.S. stock market declined, with the S&P 500 ending January down 3.10%, while European stock markets rallied.
The Federal Reserve said in its policy meeting notes at month-end that it will be "patient in beginning to normalize the stance of monetary policy" as the economy has been "expanding at a solid pace."
Analysts expect the Fed to possibly raise rates in the second half of 2015 or even later.
"What's more important than the liftoff, however, is the pace," said Vail. "It's the pace of normalization that could derail the market.... I am hoping in March that we'll get a little more detail around their expected pace."
For 2015, the outlook is "for yields to remain lower for longer," said Matt Brill, senior portfolio manager, investment grade credit at Invesco. "You might see near-term interest rates increase a little bit, but we do not see longer-term, 10-year, 30-year interest rates increase materially this year."
The European Central Bank announced last month that it will buy $1.3 trillion government bonds in a pre-emptive move to prevent the risk of deflation and to inject more liquidity into the eurozone.
The ECB's announcement "was the historic moment of the ECB starting quantitative easing after many, many years of discussions and speeches," said Ben Emons, senior vice president and portfolio manager at Pimco.
Other events that shook bond markets included the Swiss central bank suddenly deciding to remove the floor on the euro-Swiss franc exchange rate, the flaring up of the Ukraine-Russia conflict and the results of the Greek elections.
One overarching theme for the bond market is "that interest rates have fallen pretty sharply over the last year, particularly in the last two months in a more accelerated fashion," Emons said. "The long-term potential growth has shifted down in many global growth economies because of the financial crisis and the aftermath."
International bond fund performance, while slightly positive for the month, was scattered around within the group. Emerging market hard currency debt funds fell 0.19%, while emerging market local currency funds rose 0.42%. Global income funds rose 0.58%, while alternative currency strategies funds fell 0.96%.
For emerging markets in 2015, "there will be opportunities, but it's on a country-by-country basis," said Brill.
Municipal Bond Funds Up
Another group that continued to perform well was municipal bond funds, with an average return of 1.44%. High-yield municipal bond funds outperformed all other tax-exempt categories with a 1.93% gain.
After an 8.56% return in 2014, the average muni bond is not expected to do as well in 2015.
"The biggest tweak to the municipal market is the fact that some of the Street analysts are starting to revise up their estimate for supply," said Joe Baxter, senior vice president and head of municipal bond department of Delaware Investments. This contrasts with a relatively low supply the muni market has experienced in the last two years.
In addition, if the Fed starts raising rates, Baxter expects to see investor outflow from muni bonds. Nevertheless, "If we do have a correction, higher rates will bring folks back in."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
