Rarely do we see all segments of the market go up in unison, but 2019 saw broad-based gains across stocks, bonds, and commodities. In fact, not a single sovereign bond index we track ended in the red. Considering 42 central banks cut policy rates in 2019, this may have been expected, but we would have to go back to 2004 for the last time not a single S&P DJI sovereign bond index ended the year in the red.
Seeing green in 2019 wasn’t just for government bonds, as riskier segments of the bond market fared better. The S&P U.S. Aggregate Index—designed to measure the U.S. bond market by capturing U.S. Treasuries, agencies, mortgages, and investment-grade corporate bonds—posted its best return of the decade with a 7.4% return. Looking deeper into segments of the bond market, what was extraordinary was the depth and breadth of positive returns in the U.S. as well as globally. The S&P U.S. Dollar Global Investment Grade Corporate Bond Index posted the strongest return among the aggregate sectors. The 12.7% return was the highest among investment-grade sectors and just shy of the 14.3% return high-yield investors earned.
The lowest return was found in mortgage-backed securities, well above the 2.7% starting yield of the S&P U.S. Treasury Current 10-Year Index. The S&P U.S. Treasury Bond Index’s total return more than doubled that level, posting a 6.2% return. Maintaining a position in these markets allows the collection of both principal and coupon payments, contributing to the total return, while benefiting from price appreciation, as the S&P U.S. Treasury Current 10-Year Index rallied 83 bps to close at 1.9%.
Looking ahead, a starting yield below 2% could signal trouble in 2020. 2013 was the last year yields started below 2%, and all sectors of the S&P U.S. Aggregate Index finished the year in the red. In 6 of the past 10 years, the current 10-year yield started below 2.5%. The average returns for every segment significantly underperformed their long-term averages, while years starting with yields above 2.5% saw outsized gains across the board (see Exhibit 3).