2018 Fixed-Income Returns Pressured by Rising Rates, Widening Credit Spreads
Yield curve continues to flatten as rates rise.
Rising interest rates, especially at the long end of the yield curve, along with widening corporate bond credit spreads hampered fixed-income returns in 2018. Over the course of the year, the interest rate on 2-year, 5-year, 10-year, and 30-year U.S. Treasury bonds rose 61, 30, 27, and 27 basis points, respectively. The total annual return for Morningstar's Core Bond Index (our broadest measure of the fixed-income universe) was essentially unchanged at a 0.01% loss for the year. Breaking the overall index down, Morningstar's Short-Term Core Bond Index rose 1.46% and the Intermediate Core Bond Index rose 0.93%, but these gains were offset by the Long-Term Core Bond Index, which fell 3.24%. The amount that long-term bond prices fell due to rising rates more than offset the yield carry of the underlying securities.
In the corporate bond market, credit spreads widened out significantly across investment-grade and high-yield bonds. For the year, the Morningstar Corporate Bond Index (our proxy for the investment-grade corporate bond market) registered a loss of 2.30%. In the high-yield sector, the ICE BofAML US High Yield Master II index declined 2.26%. Even though credit spreads widened out more in the high-yield sector, investment grade underperformed as it has a longer duration than the high-yield index and was more negatively affected by rising interest rates.