Bond Returns Lose Their Double-Digit Returns (and Appeal)
NEW YORK (TheStreet) -- Which is it: Past is prologue, or past performance is no guarantee of future results?
It's a key question for fixed-income investors who must try to somehow forecast bond returns now that the basic rules of the game have changed, with yields more likely to rise than to fall.
Unfortunately, the answer is not very pleasing. Today, many experts say the prudent course is to assume your total return will equal the bond's coupon payment. For a 10-year U.S. Treasury note, that comes to a meager 2.7% a year, a far cry from the double-digit annual returns of some recent years, such as the 16% of 2011 or the 20% of 2008.
Past returns weren't always that great. But the 10-year averaged about 7% from 1964 through last year, according to an analysis by the Stern School of Business. Last year was pretty bad, with the 10-year losing just over 9% while the Standard & Poor's 500, the prime stock market index, returned about 32%.rise faster than the markets expected, bond prices might indeed continue to fall, wiping out all the interest earnings and producing a net loss. In theory, the opposite could occur as well, with falling interest rates driving up bond prices just as they did so often in the past. But since interest rates are very low by historical standards, the chances of that seem slim. If bond returns will languish in the low single digits for the next decade, is there any reason to own bonds? Well, even 2.7% is a lot more than you'll earn in bank savings. A five-year certificate of deposit pays just 0.755%, according to the BankingMyWay.com survey. Note, though, that the CD is insured against loss, while the Treasure note is not. Bonds, even when they aren't very profitable, also help diversify a portfolio, offsetting some of the risks of stocks. But many experts do suggest that investors revisit their asset-allocation plans and think about trimming their bond holdings.
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