Core and High-Yield Bond Returns: 1/31/15–6/30/15
For definitions of terms in the chart, visit our glossary.
This table clearly shows the value of these strategies during a period of rising rates. In 2015, U.S. rates bottomed on January 30. Since that time, interest rate risk resulted in a drag on performance, with the benchmark aggregate bond index down over 2% over the period.4
A zero duration approach to the Barclays U.S. Aggregate Index significantly reduced volatility while preserving returns; a negative duration strategy would have actually increased in value by over 4 percentage points over the period.
Among U.S. high-yield strategies, investors were able to preserve a greater portion of bond returns compared with an unhedged strategy as nominal rates increased. Over that period, the primary driver of high-yield returns was credit risk. Since increases in nominal interest rates at the short end of the yield curve were more muted, the zero duration approach was marginally more volatile. In our view, should rates rise at the short end as a result of Fed rate hikes, we believe volatility could be lower than with the unhedged approach with greater total returns.
As is the case with any investment, investors can be compensated by the market for taking a risk. Over the last 30 years, investors have continually been rewarded for assuming ever greater amounts of interest rate risk. Due to the current uncertainty in global fixed income markets, we continue to believe that investors should reduce interest rate risk via hedged strategies. For investors with a broader portfolio of interest rate-sensitive investments, negative duration strategies could serve as a broader portfolio hedge.
1Mario Draghi, ECB press conference, 6/3/15.
2As of July 10, 2015
3As proxied by the Barclays U.S. Aggregate Index.
4As represented by the Barclays U.S. Aggregate Index, as of 6/30/15.
Important Risks Related to this Article
Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. In addition, when interest rates fall, income may decline. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.