The 10-year U.S. Treasury yield declined steadily throughout the quarter, from 1.74% as of 3/31 to 1.45%. TIPS outperformed nominal Treasuries for the quarter given strong relative performance in April and May. The Bloomberg Barclays US Aggregate Bond Index rose 1.8% but remains down 1.6% YTD. Strong equity performance and robust economic data fueled risk appetites, and lower-quality securities were the best performers again this quarter. Corporates outperformed Treasuries as investors continued to reach for yield in spite of the paltry yield advantage (the average option-adjusted spread on the Corporate Index was 80 bps as of quarter-end, the lowest since 1998). The Bloomberg Barclays High Yield Index was up 2.7%. The absolute yield-to-worst for the Index reached an all-time low of 3.75% and its option-adjusted spread hit 268 bps, the lowest since 2007. Municipals (Bloomberg Barclays Municipal Bond Index: +1.4%) performed in line with Treasuries for the quarter.
The U.S. dollar was mixed versus developed market currencies but shifts were fairly modest. Thus, currency was not a major contributor to relative results for global ex-U.S. indices. The Bloomberg Barclays Global Aggregate ex-US Bond Index rose 0.9% (+0.4% hedged). Emerging market debt performed well; the JPM EMBI Global Diversified Index gained 4.1% and the local currency JPM GBI-EM Global Diversified Index was up 3.5%. Both remain down YTD, however; -0.7% and -3.4%, respectively.
Global Equities
The S&P 500 Index closed the quarter at a record high and registered an 8.5% gain in 2Q, bringing its YTD return to 15.3%. The Index is up 40.8% over the past year, and the annualized return over the past 10 years is a healthy 14.8%. The S&P 500 hit 34 record highs in the first half of the year. First quarter earnings were up over 50%, according to FactSet, and second quarter earnings are projected to grow more than 60% (YOY). Real Estate was the strongest-performing sector in the S&P 500 for the quarter (+13.1%) with Technology close behind (+11.6%). Utilities was the only sector to post a negative result (-0.4%). Growth stocks outperformed value (R1000 Growth: +11.9%; R1000 Value: + 5.2%) but lag for the YTD period (+13.0% vs. +17.0%) Small cap lagged large (R2000: +4.3% vs. R1000: +8.5%) but is ahead by a modest margin YTD (17.5% vs 15.0%).
Developed ex-U.S. stocks also had a strong quarter with virtually all developed market countries posting positive returns. The MSCI ACWI ex-USA Index rose 5.5% for the quarter and is up 9.2% YTD. As in the U.S., Utilities (-0.4%) was the lone sector to produce a negative return. Health Care (+9.9%) and Energy (+8.2%) were the top-performing sectors. Canada (+10.0%) was a strong performer and Japan (-0.3%) was notable as the lone country to deliver a negative return. The U.S. dollar was mixed against developed market currencies and thus shifts were not a major contributor to relative results. The MSCI EM Index performed in line with developed markets (MSCI EM USD: +5.0% and +7.4% YTD), but country returns were mixed. Brazil (+23%) and Russia (+14%) were top performers while Chile (-14%) was at the bottom of the pack. China was up 2% and China A-shares (+9.2%) did especially well as softer economic data in May appeared to ease investors’ concerns over potential policy tightening.
Real Assets
Real assets did very well as the economy continued to gain traction. The Bloomberg Commodities TR Index rose 13.3%. Oil prices continued to climb, closing at more than $73 per barrel, the highest in almost three years. The Alerian MLP Index was up 21.2% for the quarter and 47.8% YTD. The S&P GSCI Index climbed 15.7% and is up 31.4% YTD. REITs, as measured by the MSCI U.S. REIT Index, rose 12.0%. The Bloomberg Barclays US TIPS Index gained 3.2% and the Dow Jones Global Infrastructure Index climbed 6.9%. Gold (S&P Gold Spot Price: +3.3%) was an underperformer for the quarter.
