Jul 10, 2016

Chart: What's the (VERY) Long-Term Trend in Bond Yields?

From WSJ (hat tip to Big Picture Blog):

yield-1024x695 (1)

Fascinating chart showing yields for 10-year bonds issued by the U.S. Treasury since 1790 (had to pay for the Revolutionary War somehow). I remember the peak in 1981 very well. Apologies to those who have heard this story before. I took some money from my newspaper route, tucked it into a 5 year CD and saw my money double when I was starting college. My Dad bought a bunch of 30 year U.S. Treasury bonds around this time which were still making large interest payments to him well into this century.  He seemed to grasp the significance of what he was seeing when the 10 Year Treasury was at 15%.

What’s so remarkable about this chart is how little yield movement there was between say 1800 and 1970, where the rate fluctuated between a relatively tight band of 3% to 7%. The past 34 years have been a remarkable bull market for bonds (Recall that bond prices move inversely with yield, so as yields have dropped since 1981, bond prices have risen dramatically). In fact, over this 34 year period (1981-2015), the 10 year T-Bond has had a geometric annual return of 8.2% (I used this NYU T-Bond dataset for calculations), doubling ever 9 years (remember the rule of 72). That is incredible for what is generally considered a risk-free investment.

As an observer of the bond market (Professor Van Horne sparked my interest in bonds through his Fixed Income class in grad school back in 1996), I can tell you that these are strange times indeed! The debt of several countries has turned negative which means investors are paying for the privilege of holding bonds. Huh? So, even at 1.36% the 10-year Treasury yield remains attractive on relative basis to Japanese and German bond markets. So, can it go lower? Ya, maybe. Should you expect high single digit returns for bonds over the next decade? Probably not. And remember, what goes down (in this case, bond yields) eventually goes up and when bond yields rise, bond prices drop too. With bond yields this low, will investors turn their eyes back to the stock market? If there is one thing about the markets we should know, they always keep us guessing.


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About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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