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Wednesday, January 2nd, 2013
all eyes

13 0102 2012 fixed

Will this be the year?

That is, the year that the bond bull market finally ends.  Prognosticators are consumed by the question, even as investors keep shoveling the dollars into the diverse nations of the fixed income world.

Here’s what happened in 2012 to the major ETFs in each category.  Credit risk was embraced, with high yield (HYG) leading the way and investment grade (LQD) close behind.  CPI-protected securities (TIP) had a good return, as did municipals (MUB).

Long Treasuries (TLT) were all over the lot during the year, but the yield on the thirty-year bond was only up five basis points from beginning to end.  Mortgages had a modest return (MBB) and limited-maturity Treasuries (SHY) barely eked out a gain.

As noted by the star, there was an interesting divergence beginning in mid-November.  From that point, long bonds sold off (down 4%), investment grades were unchanged, and high yield surged ahead 3.5%.  Municipals dropped 2% in front of the looming “fiscal cliff.”

Rather than speculating on whether this is the year or not, I’d recommend that investors do a scenario analysis of the major fixed income categories for the coming year, five years, and ten years.

Based upon current yields, what do you see as the ranges of possible returns for each — and what outcomes are most likely and why?  That exercise, depressing though it is, should guide your thinking, whether “this is the year” or not.  In the meantime, all eyes are on the bond market.  (Chart:  Bloomberg terminal.)