Bond Market: 2012 Annual Review

The 2012 bond market produced healthy returns across the major asset classes and marked the eighteenth year in a row of positive gains for investment grade bonds. The Fed’s ultra-low interest rate policy depressed yields and supported prices of short-term securities and government bonds. Because of the lower yields from the safer securities, investors actively sought out the higher yields investments of the market. In addition to ultra-low interest rates, the slow global growth boosted the bond market. Investors were confident that government central banks would not raise interest rates in the near future given the sluggish economic performance across all countries.

The U.S. Federal Reserve has maintained its stance that it will not raise interest rates until 2015. Therefore, the bond prices would continue to be supported and worth investing in. However, the economy in the U.S. grew just enough to support investor confidence in the financial health of corporate and high yield bond issuers. The Federal Funds rate remains at 0.25%.

Below are the 2012 returns on various asset classes:

• Investment-grade U.S. bonds: 4.22%
• Short-term U.S. Treasuries: 0.51%
• Intermediate-term U.S. Treasuries: 1.73%
• Long-term U.S. Treasuries: 3.78%
• Mortgage-backed securities: 2.426%
• Municipal bonds: 6.78%
• Investment Grade Corporate bonds: 9.82%
• Long-term Investment Grade corporate bonds: 12.41%
• High yield bonds: 14.71%
• International government bonds: 5.66%
• Emerging market bonds: 16.52%

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Brandon Nesfield