Based upon projections for 2017, it would appear as if the global bond markets have once again surpassed expectations. Indeed, following the U.S. election and the subsequent rate hike by the Federal Reserve (Fed) in December, the “student body right†mentality among investors was that the fixed income asset class could have its share of difficulties in 2017. While it is certainly early (and as we have seen in the past, developments can change over the course of a full year), the first three months of this year have been a welcome surprise for fixed income investors.
The emerging market (EM) debt space had experienced the best performance within the fixed income universe during the first quarter, continuing to build on the positive momentum seen in 2016. To be sure, EM local debt produced a total return of +6.50% (J.P. Morgan Government Bond Index – Emerging Markets Global Diversified Index) in the first quarter, after posting a nearly +10% figure for all of last year. Some of the key reasons behind this performance in the opening three months of the year have been fundamental improvements in EM countries combined with a less hostile U.S. rate setting. Although the Fed lifted rates in March and has discussed balance sheet normalization, Treasury yields have actually been range-bound at worst, helping to support the EM local debt arena, accordingly. Looking ahead for the second quarter, EM debt has a poor historical track record in May, which suggests some caution, but any setback in a range-bound rate environment could be viewed as a long-term buying opportunity.
Total Returns
The U.S. corporate bond market managed to come in on the plus side of the ledger as well in the first quarter, although the returns have paled compared with last year’s experience. This should come as no surprise to fixed income investors, however, as calendar year 2016 represented a stellar performance for both the investment-grade (IG) and high-yield (HY) sectors. To provide some perspective, as measured by the Barclays U.S. Corporate High Yield Total Return Index Unhedged, HY produced a positive reading of +2.70% during the first quarter following a very robust increase of +17.13% in 2016. Within the IG corporate market, according to the Barclays U.S. Aggregate Corporate Total Return Value Unhedged Index, the IG sector registered a first-quarter gain of +1.22% after finishing 2016 with a positive performance of +6.11%.
