Bond Returns and Rising Interest Rates

Here’s an interesting chart from the Wall Street Journal:

bond rtns 10

I’ve seen variations of this one before, but it makes sense to re-visit this type of data so you can prepare yourself for possible future bond returns.

It’s pretty telling how closely future 10 year returns track the bond yield. It’s not perfect, but definitely a nice long-term relationship.

In the article John Bogle explains how this relationship has looked int he past:

The entry yield on the 10-year Treasury explains 92% of the annualized return an investor would have earned over the subsequent decade had he or she held the bond to maturity and reinvested the coupon payments at prevailing rates.

Interest rates have already started to rise as you can see from the slight upswing on the 10 year yield to the right of the chart. But rates have come down a long way in the past 30 years or so.

The easy prediction is to assume that there is no place for rates to go for but up.  This is a high probability bet, but the timing is what can get you.

Look at this part of the chart for a good history lesson in interest rate movements:

bond rtns 2

The 10 year was at 4% or so by the late 1920s and didn’t hit that level again until the late 1950s. I’m not saying that will happen again for sure because I can’t predict the future of interest rate movements.

Just something to consider if you are in the camp that says rates absolutely have to move higher right away.

How to predict the next decade’s bond returns (WSJ)

Further Reading:
Resetting bond return expectations



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