For fixed income investors, there was much to rejoice in the third quarter of 2024. The Morningstar U.S. Core Bond Index, which represents the U.S. dollar-denominated investment-grade bond market, rose 5.15%, its second best quarterly performance in more than 20 years, and led all funds in Morningstar’s major fixed income categories. The median value has increased. A positive profit was recorded.
Source: Morningstar. Data as of September 30, 2024.
The Federal Reserve changed its target range for the short-term federal funds rate, with long-term yields following short-term yields, which fell throughout the quarter and bond prices rose. The median value of intermediate core bond funds that invest in a combination of these high-quality bonds rose 5.0% during the quarter.
Source: Morningstar. Data as of September 30, 2024.
Strong fundamentals and a healthy economy also kept credit-sensitive assets such as bank loans and high-yield bonds in solid positive territory. Median returns for bank loan funds and high-yield bond funds in the quarter were 2.0% and 4.4%, respectively, as these funds continued to reward investors for taking on more credit risk.
Even global bond funds, which underperformed over the past few years as the dollar strengthened as interest rates rose, delivered strong returns for investors. The average fund in the unhedged global bond category rose 6.4% as the dollar weakened during the quarter.
Below, we dig into several fixed income categories and highlight how some of our favorite fixed income managers performed this quarter.
Core-plus bond funds enjoy lower interest rates
Core-plus bond managers, which venture further out of the yield curve than core and short-term bond managers, faced many challenges during the market volatility of 2022-2023. Some asset managers weathered the storm, while others struggled. However, when interest rates reversed in the third quarter of 2024, taking on more interest rate risk ultimately paid off better than managers sticking to a more cautious approach.
The silver-rated TCW MetWest Total Return Bond’s MWTIX duration, a measure of interest rate risk, is longer than its peers, and the Bloomberg U.S. Aggregate Bond Index weighed on returns as interest rates rose. The team behind this approach typically extends duration when interest rates rise and shortens duration when interest rates fall. The portfolio has a duration of 7.1 years, nearly a year longer than the peer median and benchmark, and delivered a 5.7% gain, outperforming more than 90% of its peers during the quarter.
Fidelity Total Bond FBND, an active exchange-traded fund with a Morningstar Medalist Gold rating, did not enjoy the same level of success during this period. Typically, teams don’t make big bets on duration positioning, but this has helped as interest rates have risen over the past few years. However, it returned 5.2% in the third quarter, roughly in line with the performance of its typical core-plus fixed income peers.
Global bond fund returns rise
The weakening of the U.S. dollar in the third quarter of the year was a tailwind for investors seeking opportunities outside the United States. The unhedged version of the Morningstar Global Core Bond Index rose 6.9%, while the hedged version returned 4.2%.
Bronze-rated Hartford World Bond’s HWDIX team has taken a less adventurous approach to non-US dollar exposures in recent years. Its roughly 90% exposure to the dollar helped it in the first half of the year on the back of its strong dollar exposure, but it fell behind nearly 90% of its peers in the third quarter. However, with a year-to-date return of 4.5%, it still beats 75% of its peers.
Managers with a strong focus on non-USD equities will benefit this quarter. After suffering a major performance hit in the first half of 2024, the bronze-rated BrandywineGLOBAL Global Opportunity Bond GOBSX finally achieved success in the third quarter. The company’s 8.2% gain outpaced more than 85% of its peers, but its year-to-date return of 0.4% was less impressive, lower than more than 90% of its peers.
Investment grade credit outperforms junk rated debt
The Morningstar U.S. Corporate Bond Index, which represents investment-grade US dollar-denominated corporate bonds, outperformed lower-grade corporate bonds with a return of 5.8% during the quarter. High-yield corporate bonds, as measured by the Morningstar U.S. High Yield Bond Index, rose 5.3%. Investment-grade corporate bonds typically have longer durations than high-yield bonds and have been able to benefit from lower yields.
Bronze-rated Invesco Corporate Bonds ACCHX stands out from most of its competitors, ranking in the top quartile of its corporate bond peer group, which is comprised of funds that invest primarily in investment-grade corporate bonds. Meanwhile, the bronze-rated Federated Hermes Corporate Bond Fund FDBIX lagged more than 80% of its peers, largely due to the portfolio’s high-yield bond sleeve and relatively high cash allocation. .
