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What's Driving the Boom in Bonds

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When the unexpected happens, it deserves an explanation. Arguably, the biggest surprise in financial markets this year is the strong performance of bonds. You may recall that bond prices fell (and yields rose) last year after the Federal Reserve gingerly began to reverse its easy-money policies. With yields still near historically low levels, many seers expected more pain this year. But so far in 2014, the Barclays U.S. Aggregate Bond index, a measure of investment-grade debt, has delivered a total return of 3.9%. Other segments have done even better. The Merrill Lynch U.S. High Yield Master II index, a measure of junk-bond performance, returned 4.8% this year, and the Bloomberg USD Emerging Market Sovereign Bond index, a benchmark of U.S. dollar-denominated emerging-markets government debt, gained 8.3% (returns are through May 30).

The bond market has been able to outwit even the best investors lately. In 2011, for example, legendary bond investor Bill Gross famously dumped Treasuries in his Pimco Total Return fund, believing yields were due to rise sharply. That year, the Barclays U.S. Treasury index rallied 9.8%. And in 2013, Gross loaded up on Treasury bonds, just as the market was about to tumble. So while we can’t predict what’s next, we present eight questions and answers to explain the mysterious ways of the bond market.

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