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Fund Spy

The Second Quarter in Bond Funds

A respite from rising rates.

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Spring bloomed in more than one place in the second quarter of 2021, with fixed-income markets turning in a solid performance following a rocky first quarter. The bond market was buoyed by weak to mixed economic signals, including retail sales reports that fell short of expectations and disappointingly slow job creation. These indications that the ongoing economic recovery might have hit a speed bump drove yields lower and prices higher.

As a result, long bonds generally outperformed while short-maturity bonds lagged. The Bloomberg Barclays U.S. Aggregate Bond Index, a proxy for typical U.S. core bond exposure, gained 1.8% for the second quarter after losing 3.4% last quarter. Despite the reversal in bond yields, two themes from the first quarter held. One is the stretch for yield as investors favored more aggressive sectors, and the second is inflation, as the Consumer Price Index continued to surge, up 5% year-over-year through May 2021. That led to strong performance for sectors including high-yield bonds and Treasury Inflation-Protected Securities.

Brian Moriarty does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.