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Credit Insights

First-Quarter Fixed-Income Roundup

Barclays' credit rating downgraded; UnitedHealth acquiring Catamaran.

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In first-quarter 2015, the flattening yield curve predominately drove fixed-income returns. On the shorter end of the curve, interest rates tightened modestly as indicated by the 2-year Treasury bond, which only tightened 11 basis points to 0.56%. The Federal Open Market Committee released its meeting statement and updated economic projections on March 19, and based on the changes in the FOMC's language and revisions to its economic forecasts, many investors are betting that the Fed will keep short-term interest rates lower for longer.

On the longer end of the curve, the 5-year Treasury bond tightened 27 basis points to 1.38%, the 10-year treasury tightened 24 basis points to 1.93%, and the 30-year Treasury bond tightened 21 basis points to 2.54%. In our view, the decline in long-term interest rates was driven by a combination of softening economic conditions in the United States as well as heightened demand from global investors. Compared with the minuscule interest rates in Europe and Japan, foreign investors have been attracted to U.S.-denominated fixed-income securities in order to pick up the higher-yield U.S. corporate bonds offer and invest in the safety of the strengthening dollar. Highlighting this differential in yields, the spread between the 10-year U.S. Treasury and 10-year German Bund has risen to +175 basis points, which is near the widest spread that Treasuries have ever offered over Bunds.

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