Bond funds are in a funk. In fact, this is probably one of the worst years in most investors’ memory for bond markets, Morningstar analyst Ben Johnson said.
Indeed, The Wall Street Journal reported that this is the worst bond market since 1842. Not surprisingly, long-term bond funds and ETFs featured prominently on the list of worst performers, as they are the most senstive to rising interest rates. Managers with mandates to remain invested in these securities must feel a degree of frustration in the face of these historic headwinds.
Johnson, director of global exchange-traded fund research for Morningstar, said the formula for why bond funds are having a tough time is simple. Because interest rates and bond prices sit on opposite sides of the seesaw, bond rates are going to go down if interest rates go up. But bond prices have been especially problematic because rates started at such low levels to begin with and have dramatically increased relative to where they started. The federal reserve interest rate is 0.75% to 1.00%. Rates were raised by 0.5% on May 4, and more are anticipated in the months ahead.
“So, when people come in with notions that bonds are there to diversify risks—if stocks go up, bonds go down and vice versa—that’s not how any of this works, and we were served a very clear reminder of that this year,” Johnson said.
The bad news will continue for some time, Johnson said, noting that it’s going to be a painful process. But there is also good news ahead, because when the bond yields today mature, that money likely will be reinvested in bonds that have relatively higher fixed coupon payments, he said. But for now, it’s going to be especially painful, because we started at such a low level of interest rates.
Here is Morningstar's list of the 15 bond funds and ETFs with the worst performance so far this year, as of April 30.
15. PIMCO Long-Term Credit Bond Instl
YTD Return: -19.74
Investment Type: Open-End Fund
Prospectus Objective: Growth and Income
Management Company: Pacific Investment Management Company, LLC
14. Vanguard Long-Term Corporate Bd Idx Ins
YTD Return: –19.89
Investment Type: Open-End Fund
Prospectus Objective: Corporate Bond - General
Management Company: Vanguard Group Inc.
13. Invesco Emerging Markets Sov Debt ETF
YTD Return: –19.90
Investment Type: Exchange-Traded Fund
Prospectus Objective: Worldwide Bond
Management Company: Invesco Capital Management, LLC
12. SPDR® Portfolio Long Term Corp Bd ETF
YTD Return: –19.93
Investment Type: Exchange-Traded Fund
Prospectus Objective: Corporate Bond - General
Management Company: State Street Global Advisors (Chicago)
11. FlexShares Crdt-Scrd US Lng Corp Bd ETF
YTD Return: –20.41
Investment Type: Exchange-Traded Fund
Prospectus Objective: Corporate Bond - General
Management Company: Northern Trust Asset Management
10. Western Asset Macro Opportunities IS
YTD Return: –20.75
Investment Type: Open-Ended Fund
Prospectus Objective: Growth
Management Company: Western Asset Management Company, LLC
9. Wasatch-Hoisington US Treasury
YTD Return: –21.13
Investment Type: Open-End Fund
Prospectus Objective: Government Bond - Treasury
Management Company: Hoisington Investment Company
8. Western Asset SMASh Series Cor Pl Cmpltn
YTD Return: –21.27
Investment Type: Open-End Fund
Prospectus Objective: Growth and Income
Management Company: Western Asset Management Company, LLC
7. Western Asset SMASh Series Cr Cmpltn
YTD Return: –21.54
Investment Type: Open-End Fund
Prospectus Objective: Growth and Income
Management Company: Western Asset Management Company, LLC
6. PIMCO Extended Duration Instl
YTD Return: –21.13
Investment Type: Open-End Fund
Prospectus Objective: Growth and Income
Management Company: Pacific Investment Management Company, LLC
5. Vanguard Extended Duration Trs Idx Instl
YTD Return: –23.93
Investment Type: Open-End Fund
Prospectus Objective: Government Bond - Treasury
Management Company: Vanguard Group Inc.
4. iShares 25+ Year Treasury STRIPS Bd ETF
YTD Return: –24.48
Investment Type: Exchange-Traded Fund
Prospectus Objective: Growth and Income
Management Company: BlackRock Fund Advisors
3. PIMCO 25+ Year Zero Coupon US Trs ETF
YTD Return: –24.59
Investment Type: Exchange-Traded Fund
Prospectus Objective: Government Bond - Treasury
Management Company: PIMCO
2. Simplify Risk Parity Treasury ETF
YTD Return: –25.68
Investment Type: Exchange-Traded Fund
Prospectus Objective: Government Bond - Treasury
Management Company: Simplify Asset Management Inc.
1. WP Income Plus Institutional
YTD Return: –31.82
Investment Type: Open-End Fund
Prospectus Objective: Income
Management Company: Winning Points Advisors, LLC
