- The Fed’s quick and decisive actions as the COVID-19 crisis emerged in the U.S. helped provide critical support to major risk markets. The S&P 500 is up nearly 18% quarter to date while high yield bonds climbed more than 8%.1
- Over the same time frame, however, the Barclays Agg, typically used to measure the performance of traditional bonds, has risen a much more modest 2%.2 And unlike last year, when traditional bonds benefited from a 120 bps decline in interest rates, the Agg’s return prospects seem significantly cloudier today as the 10-year U.S. Treasury yield has very little room to fall further.
- The chart shows the YTD movements of the Barclays Agg and 10-year U.S. Treasury yield (shown in an inverted scale). As it highlights, the Agg has been stuck in a tight trading range with the 10-year U.S. Treasury yield over approximately the past six weeks.
- In fact, with the 10-year having essentially flatlined near zero, traditional fixed income offers little in the way of income while even small increases in rates could have a negative impact on returns.
- Traditional fixed income investments have served investors well over the past several years. Looking ahead, however, investors may need to turn elsewhere to find investments that offer competitive income or healthy total return potential amid an economic recovery.
1 High yield bonds are represented by the ICE BofAML High Yield Master II Index. Data is as of May 28, 2020.
2 Barclays Agg refers to the Bloomberg Barclays U.S. Aggregate Bond Index.
This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice, and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. FS Investments cannot be held responsible for any direct or incidental loss incurred as a result of any investor’s or other persons reliance on the opinions expressed herein. Investors should consult their tax and financial advisors for additional information concerning their specific situation.
Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.
All investing is subject to risk, including the possible loss of the money you invest.