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Rates May Have Further to Rise

Bonds had a tough fourth quarter as rates rose, and there is room for both short- and long-term rates to head higher in 2017.

Dave Sekera: Fixed-income securities generally performed poorly in the fourth quarter of 2016 as rising interest rates pushed down bond prices faster than yield carry could offset those losses. For example, the Morningstar Core Bond Index, our broadest measure of the fixed-income universe, declined by 3.06% in the fourth quarter, and the Morningstar Corporate Bond Index, our proxy for the investment-grade corporate bond market, declined 2.93%.

However, even after accounting for the losses in the fourth quarter, the fixed-income market performed well in 2016. For example, the core bond index rose 2.64%, and our corporate bond index rose 5.81% last year. The excess return in the corporate bond index was generated by tightening corporate credit spreads, as the average credit spread of our index tightened by 40 basis points over the course of last year.

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