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Key takeaways
Performance
The Bloomberg U.S. Aggregate Index soared in the third quarter, with its 5.20% advance representing the second-highest quarterly return since 1996. Municipal bonds also performed well, with a 2.71% return. Higher expectations for an aggressive start to the Federal Reserve’s interest rate-cutting cycle boosted bond prices and drove yields lower. Treasury rates across the curve have moved up since mid-September, pressuring recent returns.
Looking ahead
A surprisingly robust September payrolls report tempered expectations for further slowing in the economy. The possibility of additional rate cuts will be affected by incoming jobs data, but the Fed must also watch inflation risks. U.S. elections may inject volatility, but we expect bonds to perform well in a range of economic scenarios and to act as a reliable ballast to equity volatility.
Approach
With strong growth and a proactive Fed, the risk of a U.S. recession next year remains low, a sentiment reflected in market prices. We remain constructive on credit but conscious of expensive valuations and possible downside risk.
Related items
Notes:
- All investing is subject to risk, including the possible loss of the money you invest.
- Investments in bonds are subject to interest rate, credit, and inflation risk.
- Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund’s trading or through your own redemption of shares. For some investors, a portion of the fund’s income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.