By Tom Burnett CFA
After two years of very positive returns, fixed income investors are now feeling the pain of a rising interest rate environment. Looking at the long-term Treasury market, the performance was excellent in each of the last two years. The long bond index rose 14.9% in 2019 and 17.9% in 2020 (all performance figures are from the ‘Wall Street Journal’). In 2021, however, rising interest rates have created a negative price picture in the major fixed income markets. For example, the index for investment grade corporate bonds is down 5% for the year, through May 21. The weaker U.S. dollar has helped non-U.S. bonds which are only down 3.1% this year. Income tax pressures have created strong demand for Municipal issues and that index is flat for the year. The important story, however, is the 12.7% decline in the index for long-term (20+years) Treasuries which is down sharply for the year. That performance is the worst of all the 100+ currency, bond, equity and commodity indexes tracked by the Wall Street Journal. By comparison, the equity markets have done quite well this year. The Dow Jones Industrial Average is up 11.8% and the S/P 500 Index is up 10.6% in 2021.
At the end of 2020, the ten-year Treasury note was yielding 0.94%, but rates rose sharply in 2021 as the economy began to recover from the impact of the Covid-19 outbreak. The rate peaked at about 1.73% earlier this year and has fallen recently to 1.62%. All investors want the economy to recover and to grow but the downside of rising interest rates cannot be ignored.
Tom Burnett CFA is Director of Research