Chart of the week

Rates, edging higher, could put bond returns at risk

With inflation stirring, rates caught investors’ attention this week. Our chart looks at the tough position rising rates could put bond investors in.

August 14, 2020 | 2 minute read

Barclays Agg total returns over time

Source: Bloomberg Finance, L.P., as of August 10, 2020.

  • After being dormant for much of the summer, interest rates caught investors’ attention once again this week as the 10-year U.S. Treasury saw its highest close in 5+ weeks. It’s too early to make a longer-term rate call, but both inflation and interest rates bear watching today, particularly as declining rates have helped fuel strong returns return across traditional bond markets in recent years.
  • In 2019, for example, spurred by a peak-to-trough decline of approximately 130 basis points, the Barclays Agg, a proxy for traditional core fixed income investments, saw its strongest annual performance – 8.7% – in more than a decade.2
  • The pandemic-induced decline in yields this year brought the 10-year yield to an all-time low of 0.54% in March and further boosted the Barclays Agg’s year-to-date total return. At the same time, however, the Barclays Agg’s income return this year has fallen as low as it’s ever been.2
  • Total returns for bonds are generated from two sources: income from regular interest payments and changes in price. As the chart highlights, interest rates’ steady decline has helped boost bonds’ price returns in recent years. With rates at or near historical lows today, however, bonds have little room left for rate-driven price appreciation while their income return is smaller than ever.1
  • Investors in traditional bonds are in a tough position today, and rates’ small move higher is a reminder of the fragile foundation underlying bonds’ rally in recent years. Against this backdrop, investors may be wise to seek returns across alternative sources of income and growth within today’s market.

  • Barclays Agg refers to the Bloomberg Barclays U.S. Aggregate Bond Index.

  • Bloomberg Finance, L.P., as of August 10, 2020.

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