Bond Market Returns, Updated March 31 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 March 31 2013, the S&P 500 – a measure of performance for large U.S. companies – registered an average annual total return of 8.53%. In comparison, the domestic bond market lagged based on the 5.02% average annual return for the Barclays Aggregate U.S. Bond Index. Bonds also underperformed developed-market international stocks, which rose 9.70% each year on average, and emerging market stocks, which returned 17.02% 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.
Find out how stocks and bonds performed in each individual calendar year from 1980 through 2012.
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 the emerging markets, which had an average annual return of 10.21%, and high-yield bonds, which returned 9.83%. 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.
- Emerging Markets 10.21%
- High Yield 9.83%
- Long-term U.S. Corporate Bonds 7.72%
- Long-term U.S. Government Bonds 7.24%
- TIPS 6.32%
- Barclays U.S. Aggregate Bond Index 5.02%
- S&P 500 Index 8.53%
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 five years ahead, however, since rates are already so low at this point.
- High Yield 10.81%
- Emerging Markets 9.44%
- Long-Term Investment-Grade U.S. Corporate Bonds 10.45%
- Long-Term U.S. Government Bonds 8.28%
- Investment-Grade U.S. Corporate Bonds, All Maturities 7.88%
- Barclays U.S. Aggregate Bond Index 5.47%
- S&P 500 Index 5.82%
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 are now ahead of long-term bonds in the three-year period, as the ultra-accommodative policies of the U.S. Federal Reserve and other global central banks has provided fuel for a prolonged rally in stock prices.
- Long-Term U.S. Government Bonds 12.39%
- Long-term Corporate Bonds 11.81%
- High Yield 10.90%
- Emerging Markets 9.87%
- TIPS 8.57%
- Barclays U.S. Aggregate Bond Index 5.52%
- S&P 500 Index 12.70%
The Takeaway
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.
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.
