2017 is coming to a close and the largest, but least talked about market in the world had another outstanding year. Despite the never-ending predictions about rising rates and a bond bear market, the bond market experienced another solid year of performance. Here are some performance figures for some of the more broadly held instruments:
- iShares Core US Aggregate Bond ETF (NYSEARCA:AGG) + 3.4%
- iShares Investment Grade Corp Bond ETF (NYSEARCA:LQD) +6.7%
- iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) + 8.8%
- iShares High Yield Corp Bond ETF (NYSEARCA:HYG) +6%
- iShares USD Emerging Market Bond ETF (NYSEARCA:EMB) +10%
- Vanguard Total International Bond ETF (NASDAQ:BNDX) +2.5%
- Vanguard Extended Duration Bond ETF (NYSEARCA:EDV) +13.4%
Interest rates were pretty quiet for most of the year as bond markets priced in higher inflation and growth following the Trump election and higher growth and inflation failed to materialize for the most part. I called this a “Trumper Tantrum” at the time and said rates were unlikely to continue moving higher in 2017. The 10-year T-Bond started the year at 2.45% and sits close to that level today while the 30 year started the year at 3.06% and sits at 2.82% as I type. Short rates rose slightly as the Fed continued raising rates, and the effective Fed Funds Rate moved from 0.55% to 1.16%.
The Yellen Fed is finding itself in a scenario oddly similar to the Greenspan Fed prior to the housing bust. As asset prices boomed around the world, global growth seems strangely low, and Greenspan found it confusing to see long rates fail to move higher with short rates. Yellen is running into the same issue as the yield curve flattens. This isn’t terribly shocking since the long end is more indicative of the state of the economy, which is something the Fed cannot control.
My general view remains somewhat unchanged – I think interest rates are in a structural period of low rates (see here for my 5 big structural reasons for low rates and low growth) with a very low likelihood of higher inflation in the coming decade. The short-term is a bit more cautious on the long end of the curve, but still not nearly as risky as bond permabears would have us believe. The permabearish narratives, which are based largely on bond market myths and misunderstandings, have kept an unfortunate number of investors from being involved in what continues to be a tremendously beneficial and profitable asset class. As stocks and other asset classes rise in value, I think bonds, despite low rates, are becoming an even MORE important diversifying asset class despite their low(ish) returns going forward.