The inverted yield curve was the biggest story of 2019 in the bond market. Historically, when long-term bond yields fall below short-term yields, as the 2- and 10-year Treasury yields did in August, recessions have tended to follow, though with wildly varying lead times. Thankfully, the yield curve has normalized since then as the 10-year yield has rallied.
“The recent steepening of the Treasury yield curve is an encouraging sign for the U.S. economy and markets,” said LPL Chief Investment Strategist John Lynch. “Continued calmness in the credit markets suggests this popular recession signal may have given us a false positive this time around.”
An honorable mention for the biggest bond market story of 2019—and one of the reasons the yield curve inverted—is the massive mountain of negative-yielding sovereign debt amid unprecedented accommodation from global central banks. Negative-yielding sovereign debt reached $17 trillion in August 2019 before rising yields globally whittled the total down to $11.3 trillion as of December 31, 2019. Progress toward normalization of global monetary policies and bond markets will be a key trend to watch in 2020.
Against this backdrop, fixed income still delivered a lot of winners in 2019. The Bloomberg Barclays U.S. Aggregate Bond Index, the domestic bond benchmark we track, returned 8.7% for the year. Both investment-grade and high-yield corporate bonds delivered impressive double-digit returns, while even the weakest bond sectors we track posted respectable gains, as shown in the LPL Chart of the Day.
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