As the new year begins in earnest, its time to look back at how bond and stock markets performed over the last twelve months.
Looking at bonds, investment-grade U.S. bonds, the Barclays US Aggregate bond index—which doesn’t include speculative-grade debt—delivered respectable returns of 5.97% for the year, including capital appreciation and coupon payments.
But bonds were easily outpaced by the U.S. benchmark S&P 500 which delivered a 13.69% return from price gains and dividend payments combined. (Price gains alone accounted for an 11.39% increase.)
Quartz writes: While stocks didn’t match their 2013 returns of 32.39%, 2014 marked the third straight year of double-digit gains for US equities, as investors priced in an economic recovery showing significant momentum.
On the other hand, the bond markets showed resilience, bouncing back from a decline in 2013, as flight-to-safety inflows to the US—driven in part by global unrest such as that seen in Russia and Ukraine—helped keep US interest rates low. (Rising interest rates would have hit the bond market, as rising rates push bond prices down.)
Of course, we’re talking in terms of indexes. There were plenty of individual bonds that did much better than stocks this year. And there are always stock market dogs that trail bonds. But with more retail investors piling into index funds in recent years, it’s always worth looking at the big picture.
So what about 2015? Will it finally be the year of the big bond market sell-off? Probably not. Sure, the market will be tested, especially as the US Federal Reserve finally raises interest rates, which is widely expected to happen this year.
The thing that investors should remember is that in the long run, stocks outperform bonds. But they also should remember that even during the worst year in recent memory for US bonds markets—1994—the Barclays Aggregate index was down only 2.9%. Compare that loss to the gobsmacking collapses of the early 2000s or the 37% decline in 2008.
Todays Other Top Stories
Learn Bonds: – Investing in short term bond funds – What you need to know. – At last, the Federal Reserve has ended the Quantitative Easing program. This may have serious implications for fixed income investments and interest rates. Many investors believe that the Fed will increase short term interest rates in 2015 and because of that reason they no longer find fixed-income investments attractive. The rates may or may not increase, but investors have to remain fully committed to the market.
Reuters: – U.S. bonds set for more modest year after banner 2014. – The U.S. bond market could enjoy a solid 2015, but don’t expect a repeat of the spectacular run that some fixed-income sectors enjoyed this year, investors said on Wednesday.
Wall Street Daily: – 2014 financial market year in review. – Bonds without credit risk were the big fixed-income winners in 2014. Using the Vanguard Extended Duration Treasury ETF as a proxy, Treasury bonds soared 45% last year.
The Daily Journal: – 2015 bond outlook: Have low expectations. – The bond market will likely produce modest returns, if they’re positive at all, according to many bond-fund managers. It’s a matter of math: Bonds are offering very low interest rates following a decades-long drop in yields. That means they’re producing less income.
BlackRock: – Yield curve basics. – BlackRock’s Matt Tucker visits a San Francisco landmark to give Blog readers a lesson on the yield curve.
Bond Buyer: – Long-term volume falls just short of 2013 total. – Long-term municipal bond issuance increased for the fifth month in a row as volume increased 39.9% in December, jumping to $37.83 billion from $27.04 billion a year ago.
Philly.com: – Municipal defaulters decline amid improving economy. – Municipal bond issuers are defaulting at the slowest pace since at least 2010, as a strengthening economy boosts local-government finances.
Morningstar: – Treasury bonds poised for biggest annual rally in 3 years. – U.S. government bonds are set for the biggest annual rally in three years as uncertain global economic prospects and the ripples from tumbling oil prices boosted demand for haven assets.
The Australian: – U.S. bonds strengthen to close out big year. – U.S. government bonds strengthened yesterday on the last trading session of 2014, capping the biggest annual rally in three years.
Market Realist: – Yields increased on long-dated Treasuries. – Yields on US Treasuries mainly increased in the week ending December 26. Only the short end of the yield curve saw flat to falling movement in yields in the week. The rise was restricted to single digits. Three, five, and seven-year maturities increased by nine basis points. The benchmark ten-year Treasury yield increased by eight basis points.
Businessweek: – Treasuries climb as yield advantage at almost highest since 1999. – Treasuries rose, headed for their first weekly gain in three weeks, as the gap in 10-year yields between U.S. government securities and German debt was at almost a 15-year high.
Income Investing: – 2014 bond scorecard: Long-term Treasuries beat the odds. – Long-dated Treasury bonds, perhaps the longest of long-shots to perform well in 2014, improbably emerged as the big winners last year, riding a sharp and unexpected drop in interest rates to a 23.19% total return in 2014, according to a Barclays index.
ValueWalk: – The Hated. The feared. The amazing. The U.S. Treasury bond. – When the world goes south, and everyone wants a stable asset, the US Treasury Bond is the only game in town.
Investment Grade Bonds
The Australian: – Debt investors looking to profit from collapse in oil prices. – The collapse of oil prices is uncovering a well of opportunities for corporate-bond investors looking ahead after a year of healthy returns and record-high debt sales.
High Yield Bonds
Income Investing: – High-yield bonds on pace for 2.5% return in 2014. – The wild ride for junk-rated corporate bonds in 2014 saw the market gain nearly 6% by midyear, then lose all of that (and then some) by mid-December, and then bounce back strongly over the final two weeks of the year to leave the market’s 2014 return at 2.5% heading into the last day of 2014, according to a benchmark Bank of America Merrill Lynch index.
ETF Daily News: – The best high-yield investments For 2015. – The 10-year Treasury yield is down about 18% in the past six months, for several reasons. Both the ruble crisis in Russia and falling global oil prices have been major contributors. Those factors have also increased volatility in the emerging bond market. That’s why there are better high-yield investments to add income to your portfolio today.
WSJ: – Who are the biggest emerging-market dollar borrowers? – (Subscription) A boom in dollar debt in emerging markets risks capsizing a host of companies around the globe as the greenback surges. Which countries are home to the biggest borrowers?
LA Times: – U.S. bull market rolled on in 2014, but investors got pickier. – Investment success in 2014 was mostly about keeping it simple. That may not be a bad way to go in 2015, either.
NY Times: – For bond investors, ignoring expert advice has been profitable. – Over the last three or four Januarys, the advice for investing in bonds has been remarkably consistent. It’s gone something like this: Beware of them, because inflation is going to rise, interest rates are going to spike and bondholders are going to lose enormous amounts of money. There were exceptions to this analysis, of course. But for the most part, this view was repeated year after year, with charts, graphs and reams of historical data marshaled in its defense. On paper it made sense. In portfolios, not so much.
FA Magazine: – Bond mutual funds attracted more money as equity funds declined in November. – Bond mutual funds saw an inflow of cash from investors running away from equity funds in November, the Investment Company Institute reported Tuesday.
Investing.com: – Top ETF stories of 2014 worth watching in 2015. – The stock market across the globe has given mixed performances in 2014. Several events will likely spill over into 2015 and continue to impact the ETF world either in a positive or a negative way. Below, we have highlighted some of these events, which will hog investor attention in the New Year.
— Mohamed A. El-Erian (@elerianm) January 2, 2015
Bonds Up, Stocks Up, Euro down welcome to day 367 in 2014
— tradingpoints (@tradingpoints) January 2, 2015
10 yr yields still far from Oct lows. Shows you how far the yield curve has moved since then. pic.twitter.com/mPtkoEoNqf
— Mike Jackson (@bondscoop) January 2, 2015
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