Bond fund's next frontier

Also worth noting is that none of the highly rated Fidelity bond funds have a “negative” duration — that is, they are not set up to increase in value due solely to an increase in rates. This is likely to be true for the vast majority of bond funds due to short-selling regulations on mutual funds. There is also likely to be some survivorship bias as funds with a negative duration would tend to underperform and close during a period of sustained declining interest rates. 

Summary

This analysis is not exhaustive, its findings invite more in-depth research. There is no way to accurately predict what the future interest rate environment might look like, but it is pivotal to understand how this environment has affected the asset class in the past and how changes could affect the future. 

It’s also important to gain some insight as to how much past performance is really attributable to manager skill vs. a “rising tide,” which has raised all ships.

This investigation is not intended to provide answers as much as it is designed to incite the right questions. 
In order for bond funds to enjoy the same tailwind they’ve had for the last generation, interest rates would have to drop below 0% in the next five years and continue down lower than negative 10% by 2045. 

And while this scenario is certainly not impossible, investors should be prepared to ask-what if the future isn’t quite as accommodating as the past?

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About the Author

Rob Matthews develops technical trading strategies as Research Director for Covenant Capital Management.

Josh Ireland performs statistical research as head of Covenant’s Analytics Department.