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Overview of 2014 First Quarter Bond Market Performance

The definitive first quarter 2014 bond market performance overview: 1Q return data, factors that helped bonds' performance, Fed policy update, outlook, and more.  

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Bonds Spotlight10

The Favorable Inflation Backdrop Remains a Major Positive for Bonds

Thursday April 17, 2014

Inflation remains low worldwide, and that's nothing but good news for bond investors. In the United States, inflation came in at 1.5% in the 12 months ended in March, well below the Federal Reserve's 2% target rate. This is a positive for the bond market in two ways. First, it creates a lower hurdle at which investors can earn a positive real (after-inflation) return. Second, it increases the odds that the Fed can maintain its low rate policy for a longer period of time.

The inflation picture isn't just positive here in the United States. Japan continues Read More...

Why Corporate Bonds May Have Limited Upside From Here

Wednesday April 16, 2014

Corporate bonds have delivered excellent relative performance thus far in 2014, building on the trend that was in place last year. Through April 15, the iShares Investment Grade Corporate Bond ETF (LQD) had returned a robust 4.3% year-to-date, comfortably ahead of the 2.6% return of the Vanguard Total Bond Market ETF (BND). One result of this strong performance is that the yield spread of the BofA Merrill Lynch US Corporate Master Option-Adjusted Index has declined to 1.16 percentage points, down from 1.28 at the start of the year and the 2013 high of 1.72 set on June 24.

Does this mean that the yield spread can't fall any further? Not necessarily. While the 1.16 yield spread is the lowest point since July 2007, it's still well above where it stood for most of 2004-2006. The yield spread on investment-grade corporates held beneath 1.0 for most of this interval, and even traded as low as 0.79 in March 2005. A similar move is possible today given the improving economy, the low default rate, and the record high cash balances on corporate balance sheets.

It's also worth noting that investors can still make money even when spreads are low. Read More...

Reassessing Fed Policy on a Day-to-Day Basis is Foolish

Saturday April 5, 2014

It's time for investors to calm down. With the U.S. Federal Reserve now well into the process of tapering its quantitative easing policy, investors are tripping over themselves to interpret how each individual piece of economic data affects the potential timing of the Fed's first interest-rate increase. The most recent example was Friday's jobs report, which prompted the media to pore over each element of the numbers to gauge the likely path of Fed policy.

The trouble with this approach, besides encouraging investors to embrace short-term thinking, is that Read More...

Do You Understand the Risks of Your Senior Loan Fund?

Friday April 4, 2014

Senior loan funds have been one of the hottest investments in the fixed-income world in the past 12 months. From March 31, 2013 through the same date this year, the flagship fund in this category - the PowerShares Senior Loan Portfolio (BKLN) - has hauled in $4.4 billion in new assets. The other three senior loan ETFs attracted $780 million of their own in that same period - and this is only counting ETFs, not the various mutual funds that invest in this category. But do investors understand what they're buying?

Senior loans have a lot going for them. As outlined here, they offer above-average yields, diversification benefits, and a way to hedge against the potential impact of Federal Reserve interest-rate hikes when that time finally comes. But these funds also feature a high degree of Read More...

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