Source: FactSet 9/30/2020 – 9/30/2023 Past performance is no guarantee of future results, which will vary.
Despite the upward trajectory of U.S. Treasuries, investors poured money into longer-duration fixed income, confident that rates would soon fall. Through August, Intermediate Core Bond, Intermediate-Core Plus Bond, and Long Government are the top three Morningstar category flow leaders this year. On the other hand, Short-Term Bond and Bank Loans, categories with very limited duration, are the top two fixed-income category outflow leaders.
However, rates continued to rise, putting pressure on fixed-income prices. The chart below shows cumulative fund flows into the Morningstar Long Government category versus the performance of long government bonds over the last three years. This chart demonstrates how difficult it can be to time markets — and the penalty for being wrong. While this long-duration category saw massive inflows, long government bonds have declined almost 37% over the last three years, as of September 30, 2023.
Standard deviation is a statistic that measures the dispersion of a dataset relative to its mean and is calculated as the square root of the variance.
Duration is a measure of the sensitivity of a fixed-income investment, such as a bond or a bond portfolio, to changes in interest rates.
Core Bonds are a category of fixed-income securities that form the foundation of a diversified bond portfolio. They typically consist of relatively stable and low-risk bonds and are fundamental to building a balanced investment portfolio.
Intermediate Core Bond, as a Morningstar category, encompasses mutual funds and ETFs that are primarily invested in intermediate-term core bonds. These funds typically focus on stable and low-risk bonds with intermediate maturities.
Intermediate-Core Plus Bond, as a Morningstar category, includes funds that invest in intermediate-term bonds. These funds may have a slightly different risk profile or strategy compared to pure core bond funds while still emphasizing stability and low risk.
Long Government, as a Morningstar category, consists of funds that primarily invest in long-term U.S. government bonds. These bonds are known for their safety and are considered low-risk investments.
Short-Term Bonds, as a Morningstar category, consist of funds that primarily invested in bonds with shorter maturities.
Bank Loans, as a Morningstar category, consist of funds that invest in floating-rate loans made by banks to corporations. These loans often have interest rates that adjust based on benchmark rates.
The Credit Duration Barbell is a portfolio strategy that combines credit exposure (typically non-investment-grade bonds) and duration (usually higher-quality, investment-grade bonds) to achieve diversification and manage risk. This strategy involves balancing the credit quality and maturity profile of bond investments.
The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment- grade, U.S. dollar-denominated, fixed-rate, taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate and hybrid adjustable-rate mortgage pass-throughs), asset-backed securities, and commercial mortgage-backed securities.
The Morningstar LSTA U.S. Leveraged Loan Index is a broad index designed to reflect the performance of U.S. dollar facilities in the leveraged loan market. Index results assume the reinvestment of all capital gain and dividend distributions.
ICE BofA US High Yield BB-B (1-5Y) tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market.
Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.
Treasury Securities are backed by the full faith and credit of the United States government as to payment of principal and interest if held to maturity. Interest income on these securities is exempt from state and local taxes.
Bonds are subject to interest-rate risk and can lose principal value when interest rates rise. Bonds are also subject to credit risk, in which the bond issuer may fail to pay interest and principal in a timely manner, or that negative perception of the issuer’s ability to make such payments may cause the price of that bond to decline.
Floating-rate funds are generally considered to have speculative characteristics that involve default risk of principal and interest, collateral impairment, non-diversification, borrower industry concentration, and limited liquidity.
Investing in below-investment-grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. These securities can also be subject to greater price volatility. Diversification cannot assure a profit or protect against loss in a declining market.
Diversification cannot assure a profit or protect against loss in a declining market.
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