NEW YORK — It took less than six months for some of the most feared investments to get investors to reconsider.
At the start of this year, much of Wall Street expected trouble ahead for long-term bonds. The bond market had just posted its first losing year since 1999, a result of rising interest rates. The conventional wisdom was that rates would only climb higher, and long-term bonds would bear the brunt of the impact.
But the opposite happened. Rates have dropped since January, and long-term bond mutual funds have been some of the best performers. Funds that focus on U.S. government bonds with an average maturity of more than 10 years have recorded an average return of 11.2 percent. That’s the most among the 32 bond-fund categories that Morningstar tracks. Mutual funds that also own long-term corporate bonds have returned 6 percent. That’s just ahead of stocks in the Standard & Poor’s 500 index.
How’d they do it? Part of it was due to short-term factors. Tensions in Ukraine led to higher demand for safe investments like bonds, as did worries about a weak, polar-vortexed first quarter for the U.S. economy. But longer-term issues also were at play. Investors are debating whether the bond market is in a “new normal,” one where interest rates will remain lower than before due to weaker growth, says Bob Jolly, head of global macro strategy for fixed income at Schroders.