Bond Market Returns, Updated September 30, 2013
How do the bond market's total returns compare to stocks over time? Below, we examine the historical returns of stocks versus 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 September 30 2013, the S&P 500 – a measure of performance for large U.S. companies – registered an average annual total return of 7.56%. In comparison, the domestic bond marke, as gauged by the Barclays Aggregate U.S. Bond Index, had average annual return of 4.59%. Bonds also underperformed developed-market international stocks, which rose 8.00% each year on average, and emerging market stocks, which returned 12.79% annually. *
While stocks have had better 10-year performance than bonds, its 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 8.59%, and emerging markets, which had an average annual return of 8.46%. Both finished ahead of the S&P 500 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 8.59%
- Emerging Markets 8.46%
- Long-term U.S. Corporate Bonds 6.27%
- Long-term U.S. Government Bonds 6.14%
- Senior Loans 5.31%
- Barclays U.S. Aggregate Bond Index 4.59%
- S&P 500 Index 7.56%
Best Performing Bond Market Segments, 5 Years
As was the case in the ten-year period, it paid to take on the risk of long-term bonds during the past five years, as both long-term government and corporate issues finished well out in front of the bond market as whole in a period of sharply falling interest rates. It isn’t reasonable to expect this kind of performance in the next five years, however, since rates are already so low at this point.
- High Yield 12.50%
- Long-Term Investment-Grade U.S. Corporate Bonds 11.73%
- Emerging Markets 9.75%
- Investment-Grade U.S. Corporate Bonds, All Maturities 9.24%
- Senior Loans 8.20%
- Barclays U.S. Aggregate Bond Index 5.41%
- S&P 500 Index 10.01%
Note: These five-year numbers are up significantly from last quarter, 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 continue in each of the next two quarters as well. 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 long-term bonds outperformed short-term debt, while bond with higher credit risk - high yield and the emerging markets - outpaced their safer counterparts. Stocks now have a massive advantage in the three-year time frame, as bonds have faltered in the past six months as stocks have continued to rally.
- High Yield 9.06%
- Senior Loans 5.95%
- Long-term Corporate Bonds 5.36%
- Emerging Markets 4.95%
- Investment Grade Corporate Bonds (all maturities) 4.40%
- Barclays U.S. Aggregate Bond Index 2.86%
- S&P 500 Index 16.25%
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 2008), and 3), bonds can play a meaningful role in long-term portfolio diversification. Keep in mind as you construct your investment portfolio.
* Indicies 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: Barclay Corporate Long Investment Grade Index, TIPS: Barclay US TIPS Index, corporate bonds - all maturities: Barclay 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 research carefully before you invest.