The combination of declining interest rates and tightening credit spreads drove fixed-income markets higher across the board in the first quarter. Morningstar's Core Bond Index, our broadest measure of the fixed-income universe, rose 2.98% in the first quarter. Underlying the Core Bond Index, Morningstar's Short-Term Core Bond Index increased 1.48%, the Intermediate Core Bond Index rose 2.42%, and the Long-Term Core Bond Index surged by 5.82% this past quarter. In the Treasury market, the Morningstar U.S. Government Bond Index increased 2.17% and in the agency market, the Morningstar Agency Bond Index rose 2.06%. Even though inflation expectations remained relatively unchanged over the past three months, the Morningstar TIPS Index gained 3.29%.
The decline in interest rates across the entire yield curve drove the outsize gains in these indexes as compared with the underlying yield carry. After hitting its highest yield since mid-2008 last November, the interest rate on the two-year Treasury bond has been steadily declining. As contagion from slowing global economic growth seeps into the U.S. economy, the market-implied probability that the Fed will hike short-term rates higher has turned the corner. As recently as mid-December 2018, the market had priced in at least one more rate hike in 2019 whereas investors are now expecting at least one cut to the federal-funds rate if not two before the year is out. This change in expectations drove demand for U.S. Treasury bonds, especially in the belly of the curve. Since the end of last year, the yield on the two-,