Wednesday, January 02, 2008

Fixed Income Returns for 2007

Clicking the chart above will show the 2007 returns for several fixed income ETFs, including SHY (1-3 yr Treasuries); IEF (7-10 yr Treasuries); TLT (20+ yr Treasuries); and LQD (investment grade corporate bonds).

Two interesting themes emerged over the course of 2007. First, we see an inflection point around mid-year (which also was when we began to see considerable weakness among equities). Up to mid-year, longer-dated debt was underperforming the short end. With the flight to quality and increased concerns over economic weakness, the long end dramatically outperformed the short end in the second half of the year.

Second, we can see that Treasuries of all durations posted gains for 2007, but investment grade corporate bonds showed a modest loss. We can also see how the gap in performance between long-dated Treasuries and corporates widened as the year progressed. This reflected risk aversion in the face of credit concerns and economic weakness.

Fixed income traders and investors express their confidence and fears regarding the economy in their purchases and sales of short- and long-dated debt and the distribution of their holdings among Treasuries, investment grade corporates, and higher yielding debt. Understanding the sentiment expressed in these patterns of returns is helpful to traders in fixed income, currency, and equity markets.


Currency Returns for 2007