Schwab: Bond Markets Little Changed Since The End Of 2015

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December 27, 2016 10:44am NYSE:AGG

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From Brett Wander: Despite warnings of a sea change in the fixed income markets, we find ourselves in a very similar spot at the end of 2016 as we were at the end of 2015.

Some things aren’t likely to change
The past several weeks were pretty crazy in terms of politics and markets. As we approach the New Year, it may seem like we’re entering a whole new world, but we’re really not.

Yellen: Still a dove
Today’s landscape isn’t all that different than it was in December 2015. Like then, the Fed just hiked rates and is forecasting several more to come. However, until actual inflation materializes, the Fed isn’t likely to move quickly. Yellen has been dovish for years and we don’t see that changing in 2017, even if Trump doesn’t like it.

Ties between Treasury yields and inflation
For much of 2016,10-year Treasury yields traded between 1.5% and 2.0%. Next year is likely to see yields in the 2% to 3% range. Given comparatively lower yields in Europe and Japan, U.S. bonds are attractive, as long as domestic inflation remains in check. Despite everything we’ve heard from Yellen and Trump of late, there just hasn’t been a meaningful uptick in inflation.

Be wary of yield temptations and credit risk
Next year could prompt investors to reach for higher yields. Beware! High-yield and emerging-market bonds may seem tempting, but the risk/reward tradeoff is currently skewed. Many factors could harm these securities in 2017, so we suggest a wary approach to higher yields and a focus on the long-term, instead.

The iShares Barclays Aggregate Bond Fund (NYSE:AGG) was trading at $107.28 per share on Tuesday morning, down $0.14 (-0.13%). Year-to-date, the largest bond-focused ETF in the world has declined -0.10%.

AGG currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #10 of 28 ETFs in the Intermediate-Term Bond ETFs category.

This article is brought to you courtesy of Charles Schwab Investment Management.

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