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Boring Bonds Come Alive

Bonds are boring, right? Stocks jump up and down and all over the place, and over several years they might even jump 100% in value. Meanwhile, the bonds in your portfolio crank out predictable coupon yields quarter after quarter after quarter.

If you’re bored by the bond market today, then you may not be paying attention. Year to date, while stocks are bouncing around at prices roughly where they were in early 2018, a sharp fall in bond yields has caused bond investors to reap some significant capital gains.

How significant? Since the beginning of 2019, investors in the 30-year Treasury bond have seen gains (interest plus price appreciation) of 26.4%—which would be a great full year’s return for stocks. Long-term bonds overall have generated a 23.5% return, as represented by the Bloomberg Barclay’s U.S. Aggregate Bond Index. Investment grade corporates have returned a not-too-shabby 14.1%, while the 10-year Treasury note has gained 12.6%.

The yield drop that caused these returns is actually jaw-dropping for market observers, who have been predicting for roughly a decade that bond rates have nowhere to go but up. The yield on the 10-year Treasury note is now just under 1.47%; it was more than 3% at the end of 2018.

Will we see more of the same? It’s very hard to imagine that same 10-year Treasury falling another 1.5%—to zero yield. So the smart money says that most of the gains have already been taken, and anybody looking for 20+ percent returns in long bonds going forward is just chasing returns after the fact. Remember, any asset that can jump 20% in a little more than half a year can do exactly the same thing—or more—on the downside.

The lesson here is that if you think of bonds as the boring part of your portfolio, then understand that there are times when they can add a little more kick to your returns than you might have expected. And there is a significant chance that they’ll give back those returns as rates stabilize and increase at some point in the future.

Please Note: This article is used with permission from a newsletter to which KFG subscribes. It is for our clients only and may not be republished.

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