US Bond Market’s Resilience Shines On

The long-running bull market in bonds continues to defy bearish forecasts, as shown by a set of exchange-traded funds. Positive year-to-date performance in all the major corners of fixed income continues to offer a stark counterpoint to analysts who expect trouble.

Long-term corporate bonds continue to lead the field by a wide margin for 2019 results. Vanguard Long-Term Corporate Bond (VCLT) is up 20.9% for the year through yesterday’s close (Oct. 15). The gain far outpaces the broad investment-grade benchmark for US fixed income via Vanguard Total Bond Market (BND), which is ahead by 8.3% this year.

Although VCLT is the clear leader in 2019, all the main slices of the US fixed-income market are posting gains—including five market subsets enjoying performance in excess of 10% this year.

Despite the bull run, worries persist. Bank of America Securities, for example, warns that the bond market’s exuberance casts a shadow over a staple asset allocation benchmark: the 60/40 portfolio (60% stocks, 40% bonds). “There are good reasons to reconsider the role of bonds in your portfolio,” and raise the equity weight, advises a research note from the bank. “The relationship between asset classes has changed so much that many investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies,” write portfolio strategists, Derek Harris, and Jared Woodard.

In a summary of the research, MarketWatch notes:

As global economic growth slows and the population in developed-market economies ages, traditionally safer assets like bonds have grown in popularity and helped create a “bubble” in the bond market that threatens to derail returns for investors who maintain a typical 60-40 split, according to the BofA analysis.

Pessimists point to the return of a positive Treasury yield curve for the 10-year/3-month spread as a possible sign that the tide is turning. This widely followed slice of the yield curve has been inverted (short rates above long rates) for most of recent history since the spring. Over the past three trading sessions, however, the curve is positive again, if only slightly.

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