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By Sarah Bush |

Can Solid Intermediate-Term Bond Fund Performance Continue?

The category held up well in 2017 despite increasing interest rates, but investors should temper their expectations for 2018.

Sarah Bush: Despite three Federal Reserve rate hikes during the course of 2017, investors in the intermediate-term bond category have fared relatively well so far this year. Funds in the group, which are home to many so-called core funds, were up 3.8% on average through Dec. 15, slightly above the 3.6% gain for the widely followed Bloomberg Barclays US Aggregate Bond Index.

Several factors contributed to that solid if not outstanding performance. For starters, even as the Fed rate hikes drove increases in short-term bond yields, yields on long-term bonds have actually come down modestly since the beginning of the year. Meanwhile, credit has enjoyed a particularly run, with investment-grade corporates handily outpacing the broad Bloomberg Barclays Agg. Junk bonds, which carry even more credit risk, did even better. As a result, funds with corporate-heavy mandates and a willingness to hold lower quality bonds, like Loomis Sayles Investment Grade Bond, have fared particularly well. That fund and others, including Western Asset Core Plus Bond, also benefited from strong performance in emerging-markets debt and currencies.

That said, investors should temper their expectations for 2018. Bond yields remain low by historical standards, and the additional compensation offered by riskier credits is relatively modest after a strong run for corporate bonds. It's also a good time to take a look at expenses on your funds, which can really take a bite in the current low-rate environment.

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