This past quarter marked the bond market’s worst quarterly performance in forty years as tracked by the Bloomberg Barclays U.S. Aggregate Index (AGG). Since 1976 (the earliest data we have), the only two times bond returns were worse than -5% on a quarterly basis occurred during the quarters ended March 31, 1980, and September 30, 1980 (-8.72%, and -6.57%, respectively). Not surprisingly, these periods were during a highly inflationary time when the consumer price index (CPI) was above 10% for several years and interest rates rose at a rapid pace.
The following graph shows the prevailing yield on the US 10-year bonds from 1950 to the present. The 10-year bond yield is one of the most widely followed measures of interest rates and it gives a sense of how interest rates behave over time.
Source: https://fred.stlouisfed.org/
As can be seen in the graph, there was approximately a 30-year period when general interest rates rose (1950’s through the 1980’s), followed by the next 30-year periods when interest rates fell. We try to take this historical viewpoint to gauge bonds behaved over these cycles.
Because data for the AGG only goes back to 1976 when interest rates were mostly falling, we must look to other data sources to gauge how bonds performed during these different rate regimes. One relevant measure is the performance of U.S. 5-year Treasury bonds.
We examined rolling one-year and five-year returns of U.S. 5-year Treasuries (based on quarterly data) to see how often they had negative returns over periods longer than one quarter. In the following chart, we show our findings:
The U.S. 5-year Treasury provides a sense of how infrequently negative bond returns have persisted over longer periods. Interestingly, when we run the same analysis on the benchmark for our bond exposures (AGG), we observe that only 9% of the one-year returns were negative and there wasn’t a 5-year period with negative total returns since 1976.
Therefore, we continue to believe investors should be rewarded by sticking to their long-term investment plans.