In bonds it was yet another year of miserably low rates brought on by even more easing from the Fed. The “extended period” language that had been the main focus of the Fed statements for over a year was exchanged for the more aggressive “at least through mid-2013” language. Operation Twist was brought on to move the average maturity of the Fed’s portfolio further out the curve to bring down longer term interest rates. The Fed’s involvement with the Euro crisis is probably unfinished, but they have already made steps toward improving liquidity conditions overseas.

The crisis in Europe, and the slowdown that’s expected to accompany the austerity that European governments will eventually be forced to implement, pushed risky assets lower in the second half of the year and US Treasurys were bid higher. Despite our issues domestically, the global market still considers the US dollar as a safe haven.

The move lower in rates, especially in longer bonds, can be seen on the table above. Longer-term bonds massively outperformed shorter-term bonds for the year, despite rates beginning the year near historically low levels.

Compared to Treasurys, Credit didn’t fare as well due to widening spreads during the year. The Markit CDS Index was higher by 32 basis points, signifying an increase in the cost of hedging credit risk. Despite that, credit was still positive for the year, compared to -1.36% for the S&P 500 over the same period.

Munis had a very strong year following a highly publicized call by Meredith Whitney to sell munis at the end of 2010. The same credit concerns that held corporate bonds back in 2011 weren’t present in the muni market as they outperformed corporate bonds of the same duration even on a nominal basis.

Have a great weekend.