Bond markets continued to build off Q1 2014's fast start, and bond fund groups of all stripes did well; from Treasuries to emerging markets and from corporates to munis—seemingly everyone had a fantastic quarter. All of this came as the U.S. economy faced mixed results in the quarter's data: Q1 GDP growth—revised from minus 1.0% to minus 2.9%—showed that consumer spending had softened (possibly because of unusually severe winter weather) and business inventories were drawn down, also pulling down growth estimates. These factors, as well as a slip in durable goods orders, kept the heat on bond prices. At the same time the consumer confidence survey data from the University of Michigan beat expectations, existing home sales (+4.9%) notched their biggest gain since 2011, and initial jobless claims fell to 312,000 to bring the four-week moving average below pre-
recession levels. But the economic data took a backseat to sectarian violence in the Middle East and the stop/start ceasefire efforts in Ukraine, each of which prompted a drive this past quarter to the relative safety of bonds.
The quarter's top bond exchange-traded fund (ETF) was
PIMCO 15+ Year US TIPS Index (LTPZ), which enjoyed a double-whammy and jumped 8.1%. Inflation data came in slightly higher than the previous reading (the fourth month inflation estimates had done so), and the yield curve flattened when prices at the long end rose during the Treasury rally. That same rally helped
PIMCO 25+ Year Zero Coupon US Treasury Index (ZROZ, +7.9%) and Vanguard Extended Duration Treasury Index (EDV, +7.1) to place second and third in the performance table. However, few investors could tolerate their volatility: ZROZ saw net outflows of $5 million for the quarter, while $230-million EDV could pick up only $13 million of net inflows. Perhaps investors didn't believe lightning could strike twice: ZROZ was the previous quarter's best performer, notching a gain of 14.1%.
At the other end of the Treasury yield curve, $979-million SPDR
Barclays 1-3 Month T-Bill (BIL) lost two basis points for the quarter as issuance jumped at the T-bill auctions in May and supply outpaced demand.
Outside the U.S. bond market, emerging-market debt barely edged out developed-market debt. iShares Emerging Markets High Yield Bond (EMHY) rose 6.4% as the U.S. dollar-denominated debt of its top holding (Turkey) continued to bounce back this year. Hard-currency types remained ahead of their local-currency peers during Q2, although local-currency debt asserted itself in June and seemed to have the momentum at the start of Q3. Among the top developed-market debt products,
PIMCO Canada Bond Index (CAD, +6.3%) edged out
PIMCO Australia Bond Index (AUD, +4.9%).
In terms of volume, investors certainly had a taste for Treasuries and none more so than iShares 20+ Year Treasury Bond (TLT, +5.1%), which saw a daily volume of 7.6 million shares on average. Though hardly the largest bond ETF at just $3.8 billion in assets, it was the quarter's favorite trading asset and well ahead of the next favorite, SPDR
Barclays High Yield Bond (JNK, +2.4%).
Finally, the second quarter also had eight new products come to market, with the crown for most successful launch going to iShares Core Total USD Bond Market (IUSB), which at quarter's end could boast the most assets ($25 million) and the second most average daily trading volume (4,200 shares) despite being the last launch of the quarter on June 12.
Jeff Tjornehoj is head of Americas research for Lipper Inc.
