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Second-Quarter 2019 Fixed-Income Markets in Review

Uncertainty--around actions by the Federal Reserve, trade tensions, and slower global economic growth--contributed to a tense second quarter in fixed-income markets.

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Mixed signals left bond investors to their own interpretations.
The broad Bloomberg Barclays U.S. Aggregate Bond Index generated 3.1%--its highest quarterly return in over seven years--despite signals of slowing economic growth and unpredictable near-term monetary policy actions. In mid-May, the yield curve modestly twitched, as the yield on the 10-year dropped below that on the three-month yield, an event that is widely interpreted as signaling an impending recession. Through June, that yield-curve relationship stayed inverted and fueled expectations that the Federal Reserve would cut rates in the coming months; yet chairman Jerome Powell and his board maintained the 2.25% to 2.5% federal-funds rate at both meetings over the quarter and qualified factors weighing on inflation as merely transitory. Anxieties over a contracting credit cycle underpinned volatility in the corporate-bond markets, as did various tariff threats from the United States aimed at China and Mexico. The corporate-bond Morningstar Category delivered 3.8% from April through June, while the high-yield corporate and bank-loan Morningstar Categories managed positive but far more modest performance than the previous period. The agency mortgage-backed securities portion of the aforementioned index delivered 2.0% for the quarter.

Funds such as  Western Asset Core Plus Bond  (WACPX), which has a Morningstar Analyst Rating of Gold, that have a longer duration profile and selective credit exposure benefited in this environment. Western Asset Core Plus Bond returned 3.9% relative to the median 3.0% of its distinct intermediate core-plus bond Morningstar Category peers. Mortgage-focused Bronze-rated  TCW Total Return Bond  (TGLMX) generated 2.8% and lagged that same cohort for the quarter.

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

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