Quick: What type of mutual fund has performed best the past four weeks?
If you guessed real estate (3.8%), precious metals (3.6%), or India (+3.5%), nice try. It was long-term government bond funds, which soared 4.5%, according to Morningstar. PIMCO Extended Duration (PEDIX) was the top-performer in the category, leaping 6.6%.
Long-term government bonds aren't exactly noted for the spring in their step. The average long-term government fund has gained an average 3.5% a year the past five years.
Bond prices rise when yields fall, and yields have tumbled the past month. The 10-year Treasury note now yields 2.24%, down from 2.55% March 17. The 30-year Treasury bond yield has fallen to 2.84% from 3.20% on March 13.
The bond market rallies on signs of economic weakness, and the 30-year yield is now lower than it was on Nov. 10, indicating that the high expectations for economic growth in the wake of the presidential election may have been overblown. Tax cuts and health-care reform have seemingly been pushed back to the fall, if not later, for example. "If gridlock persists or gets worse, we likely will see continued sluggish economic growth, rising inequality and greater debt," Michael Arone, Chief Investment Strategist for US SPDR Business wrote in his April investment memo.
Growth in commercial and industrial bank loans outstanding has fallen from 10.5% in March 2016 to 3% now, according to Moody's Analytics. And initial jobless claims and manufacturing hours worked were the weakest components of April's leading economic indicators.
The bond market is only happy when it rains. Just as the stock market often shrugs off positive news, bonds sometimes ignore positive news. The leading economic indicators, for example, were highly positive in April, gaining 0.4% — its seventh consecutive gain. Whether the stock market is wrong or right, however, an allocation to bonds would have ameliorated the 1.6% decline in the Standard & Poor's 500 stock index the past month.