Chart of the week

Even a small rate rise highlights bonds’ weakness

Traditional bonds have seen three months of negative returns. Our chart offers a cautionary outlook on bond returns in today’s rate environment.

October 23, 2020 | 2 minute read

Barclays Agg monthly returns and 10-year U.S. Treasury yield

Source: Bloomberg Finance, L.P., as of October 22, 2020. Barclays Agg refers to the Bloomberg Barclays U.S. Aggregate Bond Index. 10-year yield shows the average yield on the 10-year U.S. Treasury note each month.

  • After hovering near historic lows for much of the past seven-plus months, U.S. Treasury rates have quietly crept up in October as investors anticipate the potential for additional fiscal stimulus as well as large-scale infrastructure spending after the November election.
  • The 10-year Treasury yield is up nearly 17 basis points in October and reached a four-month high of 0.86% on Thursday. A 10-year yield below 1% is still low by historical standards, of course, but the recent rise has been enough to exert some pressure on traditional bonds.
  • The chart shows the Barclays Agg’s monthly returns in 2020 and the yield on the 10-year Treasury.1 It highlights the Agg’s strong performance at the start of the year, when the 10-year was falling quickly.
  • The chart also shows the difficult position that traditional bonds have been in since rates began to trade up from their all-time lows. The 10-year began to move modestly higher in August, for example, and since then the Barclays Agg has generated three consecutive months of negative total returns.1
  • We’ve noted before that low yields have broken the 60/40 portfolio, and the 10-year’s slight move higher in recent months provides a real-life example of the potential issues traditional bond investors could face if longer-dated rates continue to climb. The 10-year’s move also calls into question bonds’ basic ability to meet investor expectations for income, capital preservation and diversification moving forward.

  • Bloomberg Finance, L.P., as of October 22, 2020. Barclays Agg refers to the Bloomberg Barclays U.S. Aggregate Bond Index. 10-year Treasury yield shown is the average yield each month.

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