Quantitative easing brought rising expectations for inflation and higher Treasury yields at year-end, producing negative fixed-income results during the fourth quarter. Nevertheless, bond results were moderately strong for the full-year as Treasury yields fell and the Barclays Aggregate Index returned 6.5%. Already historically low cash yields declined a few basis points further at maturities of one year or less as it became clear that the Federal Reserve’s low yield policy was likely to be sustained into 2011. CMBS (+20%) and lower-rated corporate bonds (+15%) led bond market returns for the year and high-yield issues topped investment-grade returns.
Mortgage-backed returns were relatively weak, as well-publicized loan documentation problems and delayed foreclosures weighed on the sector. Interest rate volatility also took a modest toll. While the Barclays Aggregate Index returned 6.5%, the Barclays mortgage sector produced a 5.4% return, lagging the credit sector’s 8.5% return. Bond issuance was strong in 2010 as sound companies took advantage of low interest rates to restructure debt. While banks emphasized raising equity capital, financial debt still represented a reasonable portion of net new issuance and performed well for the year.
Bond results were moderately strong for the full-year, as Treasury yields fell and the Barclays Aggregate Index returned 6.5%.