Stock returns get all the headlines, and with US equities entering their first bear market since 2008, there is good reason for that. However, fixed income may account for a significant portion, or even a majority, of many investors’ portfolios, making bond returns just as important for those investors.
While we believe stock returns can offer similar upside to their history and that the current decline in prices will ultimately prove to be an opportunity, the same may not be true for fixed income.
As the LPL Chart of the Day shows, future long-term returns of bonds have been primarily determined by the starting yield. In other words, the coupon may be the most significant factor in your total return over the long term. Through Wednesday’s close, the Bloomberg Barclays US Aggregate Bond Index returned 4.8% year to date, following last year’s nearly 9% return. But because yields fall as bond prices rise, the yield on the benchmark bond index recently hit its lowest level ever, implying that total returns over the next 10-year period could be less than 2% annualized for fixed income based on that particular bond benchmark.
“Bonds have once again proven themselves a reliable ballast to equity market volatility,” said LPL Financial Senior Market Strategist Ryan Detrick. “However, investors may be underappreciating what the recent decline in yields means for the future of fixed income returns and an already tough search for yield.”
For more information on all our views, including why we currently rate equities “overweight” and fixed income “underweight” please view our latest Global Portfolio Strategy.