Bonds are Low Return and High Risk

Bonds are Low Return and High Risk

This chart shows us what has happened to bonds over the last forty years. Back in the early 1980s, yields on the 10-year US Treasury bond peaked at over 15 percent. After that, from 1981 to 2021, bond yields collapsed to less than 1.27 percent. Yes, you read that correctly: the yield on the 10-year Treasury bonds fell by over 90 percent from 1981 to 2021. A portfolio of one million dollars invested in 10-year Treasury bonds in 1981 would have generated an income of $150,000 per year, but that same investment today would only generate $12,700 per year. Clearly, bonds do not offer much return.

Moreover, bonds are in a precarious situation as far as capital preservation. The nominal GDP growth as shown is estimated to be around 4.5-5 percent for the next year, and the 10-year yields are 1.27 percent. As a rule and as shown on the graph, 10-year Treasury bonds’ yields are normally close to the nominal gross domestic product growth rate (GDP, a monetary measure of the market value of all final goods and services produced in a period of time). This means that over time bond yields will most likely trend towards 4.5-5%, the nominal GDP. I believe yields will go up as the big buyer, the Federal Reserve (Fed), stops buying or tapers buying (buys less). Bond prices go down as yields go up.

The mix of higher yields and lower prices mean total return on bond investments will remain low for the next five to fifteen years as yields and prices move to market-based, not Federal Reserve manipulated, prices. I expect total returns for bond investors to be in the range of -2.0 percent to1.5 percent, depending on the speed with which rates and yields rise and prices fall. That’s a major trouble spot for the bond market. Who will buy those Treasury notes and bonds? That situation could lead to a sell-off in 10-year and 30-year bonds. Many investors have yet to realize what is clearly evident on the charts. I want to emphasize that I do not know the timing of the increase in interest rates, but I do know rates will probably go up when market forces take over, and the Fed stops its extraordinarily accommodative bond-buying program.