Bonds Did Well in 2001

March 28, 2002 ( - Fixed-income investments had a blockbuster year in 2001 because of plummeting interest rates, but the ongoing economic recovery may make 2002 a volatile year for bonds.

That was the conclusion of Standard & Poor’s 2001 Fixed Income Report, which also pointed out that taxable bond funds had their biggest-ever annual cash flow increase as they netted more than $75 billion for 2001.

S&P researchers pointed out that the mortgage refinancing market was “exceptional” during 2001 and that bond funds enjoyed positive absolute returns among all investment objectives.

Long Bonds Revel In Lower Rates

S&P said the Federal Reserve’s moves to cut short-term borrowing rates 11 times in 2001 boosted long bonds to a more advantageous position – particularly in the spreads on two to 10-year bonds.

Other sector statistics cited by S&P included:

  • a 7.16% annual increase in intermediate high quality funds, compared to a 10%-hike in 2000 – the fixed-income area’s top performer
  • gains of 6.98% in 2001 and 6.95 % in 2000 for short-term high quality funds
  • a scant 1.68% hike for low quality funds, driven by 2001’s record number of credit defaults.

The 2002 Outlook

According to S&P, the anticipated recovery in 2002 should make for a volatile year for bond funds.

Through February, the fixed income market has continued to outperform the stock market.

For example, the Lehman Aggregate Index posted a 1.79% gain compared to a 3.36% loss for the S&P 500. High yield funds, after gaining in the fourth quarter of 2001, have continued to perform poorly with year-to-date losses of 0.75%.

Long-term high quality funds have begun to outperform their intermediate and short-term counterparts, S&P said.

A full copy of the report can be found here