Fidelity® Strategic Disciplines
A Message From the Fidelity® Core Bond Strategy Portfolio Management Team
By Eric Golden, CFA®, Fidelity Management & Research Company LLC* — December 31, 2020
- Market Backdrop: Higher-yielding assets outperformed U.S. Treasuries to finish the unprecedented year.
- Performance: The Bloomberg Barclays U.S. Aggregate Bond Index advanced 0.67% for the quarter and 7.51% for the year.
- Positioning: Increased allocation to U.S. Treasuries while maintaining an emphasis on corporate issuers.
- Outlook: Continued market volatility likely as prospective economic reopening may face headwinds.
The Fidelity® Core Bond Strategy seeks to generate interest income while limiting risk to principal over the long term.
Higher-yielding assets outperformed U.S. Treasuries to finish the unprecedented year
- Higher-yielding assets benefited from promising vaccine news and a potential divided government post-election
- Optimism of an economic reopening led investors to reduce their higher-credit-quality investments in U.S. Treasury bonds
- Despite a low- yield environment, investment-grade bonds continued to provide stability, diversification, and capital preservation
Leading up to the 2020 U.S. election, the potential for a divided government was viewed positively by investors. Many believed political gridlock would help mitigate against perceived policy agendas such as higher taxes. Further, the approval of two highly effective vaccines helped state and local economies move one step closer to a pre-pandemic environment. This context was positive for higher-yielding investment grade bonds over the quarter.
Meanwhile, U.S. Treasury prices fell during the period due to positive economic expectations and the potential for more fiscal stimulus. Yet, their overall performance in 2020 remained strong. A low-yield, volatile environment persisted for much of 2020.
Investment-grade bonds posted modest gains
- The continued recovery led to outperformance for corporate bonds relative to U.S. Treasuries and agency mortgage-backed securities (MBS)
- Lower-quality bonds outperformed higher-quality bonds for the year
During 2020, U.S. Treasuries (5.77%), agency MBS (3.87%) and corporate bonds (7.47%) all posted positive returns. For the quarter, corporate bonds returned 1.76% while U.S. Treasuries (-0.23%) returns were negative. Agency MBS (+0.24%) eked out modest returns during the period (Chart 1). Investors favored riskier assets as the year progressed, following substantial fiscal and monetary stimulus in response to the Covid-19 pandemic (Chart 2).
Increased allocation to Treasuries while maintaining an emphasis on corporate issuers
- Diversified your account across U.S. Treasuries, agency MBS and corporate bonds
- Modestly shifted portfolios to higher-quality bonds
Diversification within bonds is important. We remained opportunistic throughout the quarter. The credit quality of client portfolios shifted modestly towards higher-quality names. Where appropriate, we sought to add U.S. Treasuries at attractive entry points. U.S. Treasuries provide greater liquidity and lower risk. They also help manage portfolio duration and yield curve positioning relative to other sectors. Duration measures the percentage change in price with respect to a change in yield. U.S. Treasuries do not currently provide a significant level of yield to your account. But, they are an integral component of the asset mix.
We continued to favor investment-grade corporates given their yield advantage over U.S. Treasuries and agency MBS. More specifically, we continued to favor the financial and industrial sectors. Within financials, banks have been attractive given their strong balance sheets following increased regulation in the wake of the 2008 credit crisis. Within industrials, many companies have issued new bonds. We leaned heavily on our research team to find the companies we believe are best positioned to weather the ongoing pandemic and benefit from the recovery.
Finally, overall duration1 modestly extended. As interest rates levels fluctuate, duration can be a key driver of performance for your account.
Remaining opportunistic as we anticipate market volatility
- Vaccine roll-out and fiscal and monetary policy likely to impact the rate of a global economic recovery
- With a Democrat-controlled government, keeping a close eye on the potential for increased federal stimulus
- Maintaining a disciplined approach to help navigate this uncertain market environment
The market viewed the recent vaccine news positively. This led to a rising stock market and higher U.S. Treasury yields. Yet, increasing infections across the nation have led many state and local economies to pause or roll-back reopening plans. Continued accommodative monetary policy and the potential for increased federal stimulus will help to stabilize the economy in the short run. However, the rate of economic recovery may be impacted by unforeseen challenges.
Given this context, we anticipate market volatility in the months ahead. We will continue to manage your account with a careful and intentional emphasis on security selection, being mindful of each bond’s overall financial resiliency and liquidity. We will continue to look for attractive entry points into securities that we believe are appropriate for your account.
We believe investment-grade bonds will continue to play an important role in client portfolios. They can provide stability and diversification. They also can help preserve investor capital when used in a balanced portfolio with stocks.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917