Market Review – 2021
EQUITY: After ten consecutive quarters of positive returns, the Bloomberg/Barclays US Aggregate Bond Index faced considerable pressure as interest rates rose sharply, with the US 10-year Treasury yield increasing from 0.91% to 1.74%. The benchmark’s decline of -3.37% registers as the weakest quarter dating back to 1981 and coincides with the Treasury market also notching its worst showing since the early 1980s as well. This weakness does not come as a surprise – we wrote about the challenges of low rates in the face of an improving economy in our last quarterly review – however, as is generally the case in the capital markets, the magnitude of rapidity caught many investors offsides. Mortgaged-backed securities, a large component of the index, dampened losses, as these assets tend to carry lower sensitivity to changes in interest rates, while corporate bonds also impacted returns negatively for the index.
FIXED INCOME: Bond markets experienced dramatic moves throughout the quarter with no segment immune from severe price volatility and dislocation. As we have noted over the years, insatiable demand for fixed income and yield led to considerable inflows into all forms of fixed income securities. This phenomenon continued unabated during the months of January and February and reversed course considerably throughout March as COVID-19 hit US shores and the global economy began to shut down. As investors across the globe deleveraged and all headed for the exits at the same time, no asset class was spared from a wave of outflows.