Long-Term Bonds Have Record Year in 2019

Long-term, short-term, municipal, Treasury, high yield, investment grade—it seemed wherever category of bonds investors allocated their capital, they were winners in the bond market. Long-term bonds, in particular, had a record year in 2019—in fact, their best year in the past decade.

“This past year was one of the best since the financial crisis for fixed-income returns,” wrote Brian Moriarty in Morningstar. “The year started with a significant dovish shift in Federal Reserve policy, which led to increased demand for both interest-rate and credit risk. Because of the Fed’s pause, followed by rate cuts in the second half of the year, the environment remained supportive throughout 2019.”

As Moriarty mentioned, the central bank’s interest rate policy saw Treasury yields hit basement-level lows in 2019, which was a boon for bond prices. Investors who sought more duration via long-term bonds were especially rewarded.

“Short-term government-bond yields were the most directly impacted by the Fed’s actions, but long-term bond yields also fell, which, given their greater sensitivity to interest-rate movements, produced big gains,” Moriarty said. “They also benefit from their higher coupons, which make them more attractive to investors hungry for yield and return potential. As a result, the average long-term bond fund returned 19.3% in 2019, the category’s best year in the last decade.”

“Indeed, duration was the biggest driver of fund returns in 2019,” Moriarty added. “Any manager–in any category–that had a longer duration relative to their peers benefited from that dynamic and likely outperformed.”

Quality Debt for 2020

ETF investors who want that core bond exposure, but want to opt for more quality, investment-grade debt issues can look at the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG).

Fund facts:

  • AGG seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index.
  • The index measures the performance of the total U.S. investment-grade bond market.
  • The fund generally invests at least 90% of its net assets in component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the economic characteristics of the component securities of its underlying index.

Reasons to use AGG:

  • Broad exposure to U.S. investment-grade bonds
  • A low-cost easy way to diversify a portfolio using fixed income
  •  Use at the core of your portfolio to seek stability and pursue income

With Treasury yields near lows thanks to the central bank cutting interest rates this year, AGG might not be the best option for yield-started investors. However, for those looking for overall bond exposure–say, for a 60-40 capital allocation strategy, using an ETF like AGG would help especially given the amount of investment-grade debt issues it holds.

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