Fixed Income Hits and Misses for 2017

As each new year begins, we like to take a look back at our recommendations over the past twelve months to identify our successes and missteps. Yesterday we looked at our 2017 hits and misses for the stock market, and today we approach the same theme with the economy and fixed income.

Hits: Our 2017 Outlook expressed our view that steady growth and up to three Federal Reserve (Fed) rate hikes would drive low-to-mid single digit returns in the high-quality bond market. In the end, with three Fed rate hikes and a total return of 3.68% for the Bloomberg Barclays U.S. Aggregate Bond Index, these forecasts were accurate.

Our high-quality bond sector recommendations also performed well. Corporate bonds  gained 6.2% for the year (as measured by the Bloomberg Barclays Aggregate Credit Index). And though mortgage-backed securities (MBS) saw a comparatively smaller gain of 2.47% (as measured by the Bloomberg Barclays U.S. MBS Index), the sector outperformed Treasuries, which gained 2.31% (per the Bloomberg Barclays U.S. Treasury Index). Our expectation that the 10-year Treasury yield would end 2017 in the 2.25%– 2.75% range was also met with the 10-year yield ending the year at 2.41%.

Misses: We originally believed a tax bill would come sooner than it did, though it did ultimately pass with just a few days to spare in 2017. With regard to fixed income, we expected that potential changes to trade policy could cause emerging markets debt to suffer, but investors appeared to largely dismiss these concerns and pushed the sector up 9.3% for the year (according to the JP Morgan Emerging Markets Bond Global Index). We also were cautious regarding preferred stocks given their potential interest rate sensitivity (which was on full display in the fourth quarter of 2016), though their ties to the financial sector was a factor that helped them gain 12.3% in 2017, based on the Merrill Lynch Preferred Stock Hybrid Index.

The past can’t predict the future, but looking back at how well our forecasts held up for 2017 can help us to refine and improve our processes. We will do just that as we move forward into 2018.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted.

The Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS (agency and non-agency).

The Barclays U.S. Treasury Index is an unmanaged index of public debt obligations of the U.S. Treasury with a remaining maturity of one year or more. The index does not include T-bills (due to the maturity constraint), zero coupon bonds (strips), or Treasury Inflation-Protected Securities (TIPS).

The BofA Merrill Lynch Preferred Stock Hybrid Securities Index is an unmanaged index consisting of a set of investment-grade, exchange-traded preferred stocks with outstanding market values of at least $50 million that are covered by Merrill Lynch Fixed Income Research.

The Bloomberg Barclays U.S. MBS Index measure the performance of investment grade mortgage-backed securities of FNMA, GNMA, and FHLMC.

The JPMorgan Emerging Markets Bond Index Global (“EMBI Global”) tracks total returns for traded external debt instruments in the emerging markets, and is an expanded version of the JPMorgan EMBI+. As with the EMBI+, the EMBI Global includes U.S. dollar denominated Brady Bonds, loans, and Eurobonds with an outstanding face value of at least $500 million. It covers more of the eligible instruments than the EMBI+ by relaxing somewhat the strict EMBI+ limits on secondary market trading liquidity.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

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