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How Did Bond Funds Fare in the Second Quarter?

It was a relatively quiet second quarter for most, with the biggest losses in emerging-markets debt.

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Rates on the Move
The Federal Reserve elected to maintain rates in May but followed up with a 0.25-point rise in June, continuing a trajectory of tighter monetary policy that began at the beginning of 2016. Over the quarter, the yield on the 10-year U.S. Treasury oscillated between 3.0% and 3.3%, driven by expectations of rising inflation and continued concerns over growing U.S. government debt. The 10-year U.S. Treasury ended the quarter at 2.9%, well above its 2.5% starting point for the year. In general, yields on short- to intermediate-term bonds increased more than those on long bonds, contributing to a flattening of the yield curve. As of June 30, the difference between the 30-year and five-year points tightened to 25 basis points at the end of the period from 42 basis points at the quarter’s start.

Of particular note, demand for longer maturities remained strong, with a modest drop in those yields, particularly in May, contributing to a 31-basis-point gain for the Bloomberg Barclays U.S. Treasury Long Index over the quarter. Stubbornly low yields on longer-maturity bonds have stoked anxieties over the possibility of an inverted yield curve in the near future, a potential indicator of a forthcoming recession. Treasury Inflation-Protected Securities delivered 77 basis points on a wave of increased inflation expectations. Mortgages eked out a 0.25-point return for that same period, while asset-backed securities, bolstered by strong enough underlying U.S. consumer data and a positively performing auto-loan subsector, shone in the securitized sphere by generating 42 basis points of return.

Emory Zink does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.