http://www.investinginbonds.com/learnmore.asp?

catid=5&subcatid=19&id=199

Source: http://www.wellsfargoadvantagefunds.com/wfweb/wf/funds/commentaries/econ_20150107.jsp?sel=%2FDTF%2FFunds
%2FCommentaries&pf=1
The biggest bond market stories in 2014:

Poor performance of the weakest corporate credits

Strong performance by the weaker municipal credits

Solid performance of the longest Treasuries

https://www.edwardjones.com/groups/ejw_content/@ejw/@us/@research/docume
nts/web_content/web229973.pdf
In good news for bondholders, long-term interest rates fell instead of rising as
expected. Slower growth in the rest of the world pushed inflation and long-term
interest rates lower. As a result, U.S. bond returns were above-average. But
interest rates could reverse and start to rise, especially if the U.S. economy
grows faster than expected. The Federal Reserve is patiently waiting to raise
short-term rates, which we think wont start until the second half of the year.
http://bonds.about.com/od/bond-market-review-and-outlook/fl/Overview-of-2014First-Quarter-Bond-Market-Performance.htm
bonds actually performed quite well during the first quarter. The combination of slower-than-expected
economic growth, instability in the emerging markets, and investors growing comfort with the U.S.
Federal Reserves decision to taper its quantitative easing policy all contributed to increased demand
for bonds.
Another important issue for the bond market was the volatility in the emerging financial markets.
Concerns about slowing growth, high debt, and political turmoil raised fears that the emerging
markets could be on track for a 1990s-style crisis. Notable headlines included Chinese economic data
that persistently came in below expectations and a sharp decline in Argentinas currency after the
country ran out of funds to defend the peso exchange rate. Emerging market bonds were hit hard by
these events early in the period, but the net effect for the bond market was positive since the adverse
headlines fueled a flight to quality into U.S. Treasuries.
The environment of slowing growth and increased demand for safer assets was a distinct positive for
longer-term U.S. Treasuries, but shorter-term issues were pressured by the concerns about future Fed
rate hikes.
The gap between the 5- and 30-year issues has moved to 2.26 percentage points (226 basis points)
on May 31, 2013, to 1.83 on March 31, 2014, indicating a flattening of the intermediate- to long-term
portion of the yield curve.
In contrast to 2013, when long-term bonds fell sharply and outperformed their short- andintermediateterm counterparts by a wide margin, long-term issues outperformed the rest of the market in the first
quarter. This is consistent with the relative strength of the 10- and 30-year issues in the table above.
The returns of the three Vanguard ETFs tied to the three yield curve segments illustrates the extent to

which investors benefited by taking on a higher degree of interest-rate risk in the first three months of
the year.
ETF

1Q Return

2013 Return

Vanguard Short-Term Bond ETF (BSV)

0.39%

0.15%

Vanguard Intermediate-Term Bond ETF (BIV)

2.52%

-3.59%

Vanguard Long-Term Bond ETF (BLV)

6.97%

-8.95%