Rethink your core

Credit spreads today are tight, regardless of where you look on the spectrum. Interest rates have risen dramatically since the election, which, combined with a compression in credit spreads, has made it difficult for bond investors to find a safe haven. The chart below highlights the move higher in U.S. 10-year Treasury yields and the compression of spreads since early July 2016. Additionally, we can see the market quickly reacted to U.S. election results with the yield on the U.S. 10-year Treasury increasing by approximately 60 basis points1 from Nov. 8, 2016 to Dec. 1, 2016.

As a result of this environment, performance of traditional core (passive and indexed) fixed income strategies that are benchmarked to the Bloomberg Barclays U.S. Aggregate Index could be challenged moving forward.

Rethink your core

Data: Nov. 17, 2015 – Dec. 1, 2016, Barclays Live

What does this mean for investors?

"Know what you own" is an often-used, but very important, investment cliché. Credit research is paramount in fixed income investing so active fund managers who employ deep, fundamental research and are able to be selective in names they own or, importantly, don’t own, can help make the difference in weathering periods of volatility and uncertainty. In fact, the average fund in the Morningstar Intermediate-Term Bond Category outperformed the Bloomberg Barclays U.S. Aggregate Index by 90 basis points and the largest exchange-traded funds (ETFs)2 by more than 100 basis points (data: July 8, 2016 – Dec. 2, 2016, Morningstar Direct).

1 Basis points (bps) are a measurement equalling one hundredth of one percent, used chiefly in expressing differences of interest rates.

2 “Largest ETFs” is represented by the Vanguard Total Bond Market ETF (BND), the iShares Core Total U.S. Bond Market ETF (AGG), and the Vanguard Intermediate-Term Bond ETF (BIV), which amount to approximately 91% of the AUM in the ETF category within the Morningstar U.S. Intermediate-Term Bond Category.

“U.S. Treasury” is measured by the Bloomberg Barclays 10-Year U.S. Treasury Bellwethers Index, which is composed of public obligations of the U.S. Treasury with a maturity of 10 years.

“U.S. Corporate High Yield” – OAS (Option adjusted spread) is measured by the Bloomberg Barclays U.S. Corporate High-Yield Index, which is composed of U.S. dollar–denominated, noninvestment grade corporate bonds for which the middle rating among Moody’s Investors Service, Inc., Fitch, Inc., and Standard & Poor’s is Ba1/BB+/BB+ or below. OAS is the difference between average high yield bonds and the index.

The Morningstar U.S. Intermediate-Term Bond Category compares funds that invest primarily in corporate and other investment grade U.S. fixed income issues and typically have durations of 3.5 to 6.0 years. These funds are less sensitive to interest rates, and therefore less volatile, than funds that have longer durations.

The Bloomberg Barclays U.S. Aggregate Index (formerly known as the Barclays U.S. Aggregate Index) is a broad composite that tracks the investment grade domestic bond market.

Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt.

High yielding, non-investment-grade bonds (junk bonds) involve higher risk than investment grade bonds.

The high yield secondary market is particularly susceptible to liquidity problems when institutional investors, such as mutual funds and certain other financial institutions, temporarily stop buying bonds for regulatory, financial, or other reasons. In addition, a less liquid secondary market makes it more difficult for a fund to obtain precise valuations of the high yield securities in its portfolio.

All third-party marks cited are the property of their respective owners.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.


Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.


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