A funny thing happened while fixed-income aficionados were following the departure of PIMCO CEO Mohamed El-Erian and the reported breakdown in his relationship with PIMCO founder Bill Gross (not to mention Janet Yellen’s new role as chairwoman of the Federal Reserve): Bonds had a good quarter.
“Bonds actually matched the performance of stocks over the first quarter of 2014, contrary to many expectations at the start of the year,” said LPL Financial (LPLA) research strategist Anthony Valeri, CFA, in his report “No Fooling, Good Quarter for Bonds,” released Wednesday.
That’s right. The Barclays Aggregate Bond Index finished the quarter with a 1.8% total return, which is equal to that of the S&P 500 Index after reinvestment of dividends, according to Valeri.
“Bond prices rose across the board following a difficult 2013, and yields fell, with the 10-year Treasury yield closing the first quarter 0.3% lower,” he explained. “Stocks ran behind bonds for much of the first quarter, but a strong day for stocks on the last day of the quarter closed the gap.”
Preferred-stock bonds led the pack with gains of 6.5% in the first quarter, followed by municipal high-yields at 5.9%, according to LPL Research.
Emerging market debt rose 3.5%, muni bonds 3.3%, unhedged foreign bonds 3.2% and high-yield corporates 3.0%.
“Lower-rated, more economically sensitive sectors such as high-yield bonds shook off the growth uncertainties affecting stocks,” noted Valeri, “as investors focused on a low default environment and a still-strong capability to repay debt obligations.”
What pushed bond returns higher? Weaker economic data, geopolitical uncertainty and a reduction in Federal Reserve bond purchases.
“Investors questioned the ability of the economy to stand on its own given the two factors above and the Fed’s widely anticipated reduction of bond purchases,” the LPL Financial analyst said. “The Fed has steadily reduced its monthly bond purchases by $10 billion at the conclusion of each of its last three meetings, adding to investor nerves and helping to support bond prices.”
That’s the good news.