2016 total return SHORTER-DURATION SECURITIES FARED WELL AS INTEREST RATES ROSE IN 2016 High yield bonds Senior secured loans Investment grade bonds 30-year Treasury bond 10-year Treasury note -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 17.5% 9.9% 6.0% 0.9% -0.2% Source: Bloomberg. High yield bonds represented by the Bank of America Merrill Lynch U.S. High Yield Master II Index. Senior secured loans represented by the Credit Suisse Leveraged Loan Index. Investment grade bonds represented by Bank of America Merrill Lynch U.S. Corporate Master Index. 30-year Treasury bonds represented by Bank of America Merrill Lynch Current 30-year U.S. Treasury Index. 10-year Treasury note represented by Bank of America Merrill Lynch Current 10-year U.S. Treasury Index.

  • Interest rates experienced a significant and sustained climb in 2016. It was their largest rise since the “taper tantrum” of 2013 and followed several years of investors looking for signs of rising rates, only to see them continue their long-term decline.
  • After reaching a post-Brexit low of just 1.37% in July 2016, the yield on the 10-year Treasury note began to slowly rise through much of the second half of the year before experiencing a sharp jump after the November 2016 elections. In mid-December, the yield on the 10-year Treasury note reached its highest point in more than two years.12 It ultimately settled down slightly from its peak to end the year at 2.45%, but still rose more than one percentage point from its July 2016 low.1
  • Meanwhile, 3-month LIBOR closed the year at its highest point since 2009 and recently breached the 1.00% floor that is currently included in most senior secured loans.13
  • Within this environment, duration proved to be an important driver of returns across the fixed income landscape. As the chart highlights, total returns on high yield bonds and senior secured loans far outpaced those of their longer-duration peers including investment grade bonds and longer-dated Treasuries.14

1 Federal Reserve Bank of St. Louis, http://bit.ly/29ecBfp.
2 Bank of America Merrill Lynch U.S. High Yield Master II Index.
3 Federal Reserve Bank of St. Louis, http://bit.ly/2dn3Kt7.
4 Bloomberg.


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