Fund selector sentiment was clearly on the negative side for investment grade government and corporate bonds when we conducted a poll in mid-December last year. At least half of fund buyers in almost every European country said they would decrease their allocation in the next 12 months. Their attitude to corporate bonds was slightly less negative, but sellers outnumbered buyers in all but one country.
Their subdued expectations were accurate, since euro-denominated government and corporate debt generated their poorest returns since 2008, just above or just below zero depending on the index you use. We asked asset managers only about their outlook for government bonds. Though on aggregate they were expecting a negative return, there were only few who had foreseen such an unexciting year for govvies. Less than half of the surveyed asset management companies forecasted a return between -5% and +5%, with the majority either expecting an abrupt start to a bear market or a continuation of the bull market of the preceding years.
The dollar made the difference
While there is a consensus that the bond bull market has come to an end, there were still double digit returns to make in 2015. However, this was due to currency rather than bond price appreciation. Throughout 2015, the single driver of returns for bonds was the US dollar. As you can see in the chart above, the returns made by euro-based investors from US investment grade corporate bonds were entirely attributable to the 11.64% rise of the dollar versus the euro in 2015. If they had hedged their currency exposure, which many investors unfortunately do, they would have lost money, since the respective bond prices decreased marginally through the year.
High yield bonds are the single fixed income asset class which stood out positively for European investors in 2015. US high yield bonds provided positive returns thanks to the appreciating dollar, though the the Barclays US High Yield Index is down 5% year-to-date in dollar terms, after the recent plunge of the oil price.