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%.
Bond returns come in two parts. First is the interest earnings, or coupon payment. Then there's the price change of the bond itself. For several decades up to and during the financial crisis, interest rates were drifting downward. That meant investors were willing to pay a premium for older bonds that were more generous. Bond prices rose, often contributing more to the return than the interest earnings.
Now most experts expect things to change, with interest rates gradually rising. That can make the older, stingier bonds less desirable than newer bonds, causing their prices to fall.