Investment returns were positive in the first quarter (see chart on following page). Equities managed to end the period with solid gains, though off their highs as the Japanese earthquake took the wind out of the market’s sails. Large company U.S. stocks performed roughly on par with those of smaller U.S. companies, and there was little differentiation between the returns in growth and value stocks. Emerging markets continued to lag, and Japanese stocks led the way lower, no doubt due to the crisis facing that country.
Returns in the fixed income market were mixed. Of the three types of bonds—Treasury, corporate, and mortgage—the Treasury sector seems the least favorable. Facing continued issuance increases and an eventual rise of interest rates, 20- and 30-year Treasury bonds were modestly lower in the first quarter. Corporate bonds, which boast better fundamentals (i.e., better balance sheet health and more growth) managed a slight gain and remain attractive, although yields on a going-forward basis will likely not be as exciting as they once were.
Mortgage-back bonds represent the third leg of the fixed income stool. Before the credit crisis, roughly 90% of mortgage debt was rated AAA. After a wave of downgrades, the “natural” buyers of mortgages, which include insurance companies, pension plans and other well-heeled investors, own little of such debt.
Finally, municipal debt rebounded in the first quarter from the significant drubbing it took in the last half of 2010. Much of the stress on this market is due to suggestions that massive defaults are looming due to the weakening finances of America’s towns and cities.