As 2019 begins to draw to a close, investors are looking at how their investment portfolios have performed. For the most part, stock investors have to be pleased with how the year has gone, with returns of close to 25% for the S&P 500 and many individual stocks having shown even bigger gains.
Yet what's surprising is that in a year in which stocks are performing well, the bond market has also managed to produce solid returns. As you can see below from the year-to-date returns of various iShares bond ETFs, those who invested their money in Treasury bonds with longer maturities got rewarded handsomely, while even investors who opted for lower-risk short-term Treasuries still managed to see gains for the year.
Data source: iShares. Represents year-to-date returns as of Nov. 21 for iShares bond ETFs of these maturities. Chart by author.
Early in the year, it didn't look like things would play out this way for the bond market. Many investors believed that the substantial increases in interest rates in recent years would continue into 2019, and those rate increases would hurt bond prices. Longer-maturity bonds are more sensitive to interest rate changes, and so early in the year, bonds with maturities of 20 years or more were taking the biggest hits.
Yet when the Federal Reserve decided to change course and start cutting short-term interest rates, bond market investors celebrated the news. The resulting slide in interest rates of bonds of all maturities produced capital gains on top of the interest payments that bond investors received, and the longer the maturity, the larger the capital gain.
As investors look at 2020, many believe that 2019's strong returns for bonds aren't likely to repeat. Yet the bond market has defied calls for an imminent implosion for years, and those who've stuck with an asset allocation model that includes both stocks and bonds have been richly rewarded.
