Bonds, Lame Bonds

Bonds’ historical role as an important hedge against uncertainty in a diversified portfolio is well established. But that role is over for good or – more likely - over for a while of some indeterminate length.

As the Morningstar people sort through the components in the quandary they see signs of slight decline and modest uptick as well. Here are bits from their Q1 report card.

*Problem #1 is good news. The economy is coming back, and bonds love bad times best. 

*Massive Government stimulus could lead to high inflation which is not friendly to bonds.

*If interest rates finally go up, that too is a threat to most fixed-income instruments.

For their part, these days, bonds just don't do much better than money markets.

Writes Morningstar:

Ultimately, most fixed-income Morningstar Categories lost ground in the first quarter of 2021. Long government funds trailed the pack with an average fall of 12.8%, while floating-rate bank-loan funds led the way with an average gain of 1.5%.

In that light, in the quarter just completed, long term treasuries plunged and short term treasuries modestly declined. Shorter and ultra-shorter duration funds and inflation protected did best gaining in some cases 0.5% to 1.1% in the quarter (pro-rated, that would be 2 and 4.4% respectively).

This being the case there was a concerted move toward risky junk credit, and convertibles, something advised against in recent years as a lot of zombie companies seemed lurking. 

Morningstar expounds:

Aggressive approaches to credit risk were generally rewarded during the quarter. Fidelity Advisor High Income Advantage (FAHCX) gained 4.2% in the first quarter, besting most peers in its high-yield bond category, thanks to its elevated stake in lower-rated bonds along with its roughly 20% allocation to equities.

Emerging markets bonds had done well in H2/2020. Alas, rising yields proved detrimental to that trend, and the first quarter of 2021 undid a lot of the good will that had been lavished on 'furners'' debt. An uptick to date in the US dollar does not help some (most) of these emergency market debts either.

To round out our speedy lunge through the range of bonds we have US munis. The bad news of COVID turned into good news of US Government borne fiscal relief, and signs of improvement, so mark "one for the munis." - Baruch Bernard

Related:
https://www.morningstar.com/articles/1032167/the-first-quarter-in-bond-funds

Edward R. Murrow: "anyone who isn't confused doesn't really understand the situation."