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Bond Funds Year in Review: A Tale of Many Markets

2016 was anything but a quiet year for bond-fund investors.

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This has been anything but a quiet year for bond-fund investors. The gain on the broad taxable market Bloomberg Barclays U.S. Aggregate Bond Index stood at an unremarkable 1.9% in the closing days of 2016, but that result obscured a number of twists and turns. In January and into early February, plunging oil prices and concerns about the impact of a slowing Chinese economy on global growth sent prices on riskier bonds plummeting and fueled a rally in U.S. Treasuries. Coming into the spring and summer months, the domestic economic picture improved as geopolitical risk took center stage: the Brexit vote in the United Kingdom and the U.S. election. Bond markets reacted sharply to the U.S. election--and the expectation of fiscal stimulus--and an increase in U.S. Treasury yields that started in the third quarter accelerated sharply after Nov. 8.

A Bond Bull and Bear Market All in One Year
The first half of the year brought good news for investors in high-quality bond funds, as the Federal Reserve remained on hold and U.S. Treasury yields steadily declined. In the weeks following the U.K.'s Brexit vote, the yield on the 10-year Treasury fell to 1.4% down from more than 2.3% at the beginning of the year. The long-term government-bond Morningstar Category was the top-performing fixed-income category, posting a nearly 13% gain. While not quite as impressive, the Aggregate Index returned a solid 5.3% over the period, and the intermediate-term bond category, home to most core funds, was up close to 5% on average.

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Sarah Bush does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.