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Bond Market Midyear Review: The Calm Before the Storm?

The second half of the year is shaping up to be even more eventful than the first.

John Gabriel, 07/02/2015

Bond-fund investors have had plenty to digest over the first half of 2015. Speculation on when the Federal Reserve will raise its benchmark interest rate, and by how much, remains at the top of this list given the broad ramifications that a change in U.S. interest rates would likely have on global asset prices.

A steady stream of headlines has also been coming out of Europe as Greece's debt crisis has mushroomed. There has also been a divergence in monetary policy among the world's major central banks as regions across the globe have been at different points in their economic cycles. As a result, relative currency valuations will continue to be crucial indicators.

Other major themes thus far in 2015 have included sharpened liquidity concerns in the otherwise rebounding domestic high-yield market, as well as volatility in the municipal market triggered by extra supply and fears around pockets of distressed credits.

Against that backdrop, performance across the fixed-income Morningstar Categories has varied considerably. The following tables highlight the best- and worst-performing categories through the first six months of 2015.

Below, we recap several of the aforementioned themes from the first half of 2015. As these stories unfold in the coming months, the second half of the year is shaping up to be even more eventful than the first.

Watching the Fed
Fixed-income investors continue to fret about the potential timing and magnitude of future rate hikes from the Federal Reserve. Coming into 2015, the general consensus was that the tightening cycle would begin in June, but after a round of economic data that was slightly weaker than anticipated, expectations shifted to a September rate hike or later. Taking action in September would allow the Fed to review the economic data from the second quarter and either confirm a stable and strengthening U.S. economy or hold off for further evidence before it decides to act.

John Gabriel is an ETF strategist with Morningstar and contributor to Morningstar ETFInvestor. Click here for a free issue.

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