Predictions of the death of the bond market turned out to be premature.
Surprise: Bond funds are doing just fine.
After turning in their worst quarterly performance in years, bond funds were supposed to keep struggling as the calendar flipped to 2017.
But reality, at least so far, has turned out to be nearly the opposite of expectations. Rather than continuing to drop, bond prices have perked higher this year. That’s helped funds focused on intermediateterm U.S. government bonds return an average of 1 percent through the first third of the year, more than they have in three of the last four full years. Returns have been better for funds that add in corporate bonds, which have higher yields than Treasurys.
The turnaround for bond funds, which serve as the safe corner of most 401(k) accounts, is only the latest example of predictions for the death of the bond market being premature. And investors have returned to them. More than $100 billion flowed into bond funds during the first three months of 2017, double the pace of last year’s start, according to the Investment Company Institute.
Despitewhat’s happened this year, virtually everyone agrees that prices for bonds aremore likely toweaken than to rise in upcoming years. That’s because bond prices move in the opposite direction of their yields, and most everyone expects yields to rise, eventually.
THE RECOVERY
Bond funds got slapped lastNovember by a swift rise in interest rates after Repub- licans swept the WhiteHouse and Congress. The thoughtwas that tax cuts, a big infrastructure spending package and other changes inWashingtonwould lead to faster economic growth, higher inflation and increased borrowing by the federal government. Each of those tends to push rates higher, and thus bond prices lower.
But rates began sinking shortly thereafter. One big reason: Republicans’ difficulty in overhauling the health care system, something they had been promising to do for years. The market’s thinking flipped: Specifically, if they have trouble with that, maybe tax cuts, infrastructure spending and the other potential changes that drove up rates wouldn’t happen.
THE SPLIT OPINION
While the bond market’s expectations for economic growth have ratcheted back, stock investors still are optimistic and the Standard & Poor’s 500 index remains close to its record high. It’s a dichotomy that’s drawing more attention.
Erin Browne, head of macro investments at UBS Asset Management, leans more to the stock market’s side.
“Yields are too low based on the pickup we’re starting to see in the economy,” she said. “People largely right now are buying bonds at the wrong time.”
Browne doesn’t think rates will go back to where they were before the Great Recession, when the 10-year Treasury had a yield of more than 4 percent, for a while. But she does expect them to rise.
“This is the first year, really since the global financial crisis, where you have all countries contributing to global GDP growth,” Browne said.