Higher Volatility, Lower Returns Likely in the 2018 Bond Market

Given the surprisingly solid bond market performance of 2017, what might fixed income investors expect in 2018? Unfortunately, lower returns. Despite favorable risk asset performance expected from strong earnings growth and ongoing demand, in our view investors should not expect to earn a return higher than the yield of the Bloomberg Barclays Aggregate Index, which was 2.71% at year end.  Instead, we believe investors are likely to experience higher volatility and lower returns this year versus what they enjoyed in 2017. 

Our Macro View

For several years, we have referred to the US economy as a “caterpillar” economy. Since the 2008 Great Recession, the economy has inched along, alternately accelerating and decelerating, as it continues to steadily gain ground. For 2018, we foresee another year of caterpillar-like growth.