4 August 2020

Near-Term Target Date Funds Suffer With Bond Market Woes

Share This Story

The bond market’s poor performance in second quarter had a profound effect on near-term target date funds. Even the most conservative allocations saw considerable drops caused by concerns over the timing of when the Federal Reserve will scale back its bond-buying program.

This may have a significant impact on 401(k) participants - according to research by Vanguard  - nearly 31% of contributions to plans are allocated to target date funds.

In May, when the Federal Reserve indicated that it was considering a slowdown of its bond purchases starting as early as September, bonds saw a massive sell-off in May and June. The Barclays U.S. Aggregate Bond Index declined 2.3% during that period.

With the bond selloff, performance of target date funds also suffered, especially for near-term target date funds which are heavily-invested in fixed income. The Morningstar Conservative 2015 benchmark showed a decline of 2.2% for second quarter. The benchmark allocation calls for 30% stocks, 49% bonds, and 13% Treasury inflation-protected securities (TIPS).

During second quarter, TIPS showed the biggest declines at 7.1%. U.S. aggregate bonds declined 2.3%, high-yield bonds dropped 1.4%, and U.S. short-term bonds declined 0.1%.

This all came at a time when the equity markets were trending upward. U.S. Small-cap growth stocks were up 3.7% and U.S. large-cap value stocks were up 3.2% in second quarter.

Target-date funds more heavily weighted in equities or shorter-duration bonds fared better than more conservative offerings. Positive performance from equities helped to overcome any losses bond losses they may have experienced. And with shorter-duration bonds, which don’t pay as much on yields, as interest rates rise, they may pay a higher nominal rate.

It is likely that find managers will do more to diversify their fixed-income sleeves so that they can better weather bond market changes. 

Join Our Online Community
Join the Better Way To Retire community and get access to applications, relevant research, groups and blogs. Let us help you Retire Better™
FamilyWealth Social News
Follow Us