It's been 'about as good as it gets' for bond investors

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Bond investors just had an absolutely dynamite quarter.

Steven Major, head of global fixed income research at HSBC, thinks it was so good in fact that it may be the peak.

"From a historical perspective, returns have been about as good as it gets for bonds," said Major in a note to clients Wednesday.

Returns for bonds in everything from US Treasuries to European high yield corporates for the first three months of 2016 were far above their 2015 returns.

Especially considering the chilly start for bonds in 2016, the comeback is certainly welcome for investors.

The biggest surprise may be emerging markets. In fact, based on Major's breakdown, emerging market bond returns were 7.7% for the first quarter versus -10.7% for all of 2015.

Tom Nash, an emerging markets fixed income researcher for HSBC, said that returns for emerging markets may come down a bit from the dizzying high, but not by too much.

"I think it’s been driven more by the increasingly benign external rate backdrop and the removal of tail risks, such as volatility associated with China," said Nash in the note.

"But when you put that into the context of the last three years when spreads have widened, offshore investors have deleveraged and EM currencies have consistently been on the back foot against the US dollar, it creates some room to be positive on the asset class."

The problem is that the returns were so good in the first quarter, it may be hard to repeat the feat.

"The level of performance in Q1 2016 will be tough to repeat for some sectors," said Major.

Larry Dyer, a US-focused bond researcher for HSBC, said that the positive returns may mean it's time for investors to be wary.

"I think markets are too close to our targets for comfort," said Dyer in the note. "I have been focusing on the typical trading ranges for US rates to try to increase returns and manage risks with the market near our target. This approach argues for taking risk off the table after a significant rally."

Enjoy it while you can.

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