How do the bond market's total returns compare to stocks over time? Below, we examine the historical returns of stocks and bonds, along with the best performing segments of the bond market in the three-, five-, and ten-year periods. This article will be updated at the end of each quarter.
Stocks vs. Bonds
During the ten years ended on December 31, 2013, the S&P 500 – a measure of performance for large U.S. companies – registered an average annual total return of 7.40%. In comparison, the domestic bond market, as gauged by the Barclays Aggregate U.S. Bond Index, had an average annual return of 4.55%. Bonds also underperformed developed-market international stocks, which rose 6.91% each year on average, and emerging market stocks, which returned 11.16% annually. *
While stocks have had better 10-year performance than bonds, it's important to keep in mind that bonds offer diversification, and that the presence of bonds can help smooth out the volatility of the stock market. In addition, there may also be extended periods in which bonds outperform stocks - as was the case from 2000-2002.
Best Performing Bond Market Segments, 10 Years
One of the most common maxims in investing is that more risk equates to higher long-term returns. The 10-year results bear this out, as the best performing market segments were high-yield bonds, which returned 8.35%, and emerging markets, which had an average annual return of 8.19%. Both finished ahead of the S&P 500 - even after stocks 32%+ gain in 2013 - as well as the bond market as a whole.
Below are the best performing market segments for the 10-year period, with the major bond and stock indices for comparison.
- High Yield 8.35%
- Emerging Markets 8.19%
- Long-term U.S. Corporate Bonds 7.51%
- Long-term U.S. Government Bonds 6.37%
- Investment-Grade Corporates (all maturities) 5.33%
- Barclays U.S. Aggregate Bond Index 4.55%
- S&P 500 Index 7.40%
Best Performing Bond Market Segments, 5 Years
The past five years has been a time of improving economic conditions, a gradual increase in investors' appetite for risk, improving corporate earnings, and a broad rally in U.S. equities. This has led to outperformance for the bond-market segments that are most sensitive to economic conditions: high yield bonds, senior loans, and emerging market debt. When looking at these numbers, it's important to keep in mind that these numbers will almost certainly not be repeated in the next five years:
- High Yield 18.08%
- Senior Loans 14.37%
- Emerging Markets 11.72%
- Long-Term Corporate Bonds 10.29%
- Investment-Grade Corporates (all maturities) 8.93%
- Barclays U.S. Aggregate Bond Index 4.44%
- S&P 500 Index 17.93%
Note: These five-year numbers are up significantly in the past two quarters, as the worst phase of the 2007-2008 financial crisis has dropped off the back end of the five-year period. Barring a major market sell-off, this effect will also continue in the fourth quarter of 2014. Consider this evidence that even long-term performance numbers can be misleading.
Best Performing Bond Market Segments, 3 Years
The three-year period is similar to the five- and ten-year intervals in that it paid to take risk, as bonds with the highest sensitivity to credit conditions - high yield and the emerging markets - outpaced their safer counterparts. Stocks now have a massive advantage in the three-year time frame, as bonds faltered in 2013 while stocks continued to rally.
- High Yield 9.17%
- Long-term Corporate Bonds 7.11%
- Emerging Markets 6.10%
- Long-term Government Bonds 5.47%
- Senior Loans 5.44%
- Barclays U.S. Aggregate Bond Index 3.26%
- S&P 500 Index 16.16%
It’s true what the legal disclaimers on investment brochures always say: past performance is indeed no guarantee of future results. However, these return figures tell us three things. 1) longer-term investors shouldn’t be afraid to take risks, 2) holding investments for the long term can smooth out the impact of even the worst market meltdowns (such as that which occurred in stocks and high yield bonds in 2008), and 3), bonds can play a meaningful role in long-term portfolio diversification. Keep in mind as you construct your investment portfolio.
* Indices used are: U.S. large company stocks: S&P 500, U.S. small companies: Russell 2000 Index, developed market international stocks: MSCI EAFE, emerging market stocks: MSCI Emerging Markets, emerging market bonds: JP Morgan EMI Global Diversified Index, high yield bonds: Credit Suisse High Yield Index, long-term U.S. government bonds: Barclays U.S. Government Long Index, long-term U.S. corporate bonds: Barclays Corporate Long Investment Grade Index, TIPS: Barclasy US TIPS Index, corporate bonds - all maturities: Barclays Corporate Investment Grade Index, Senior Loans: S&P / LSTA Leveraged Loan Index.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be construed as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities. Always consult an investment advisor and tax professional before you invest.