Price appreciation as a % of Barclays Agg return
Source: Bloomberg Finance, L.P., as of October 30, 2020. Based on trailing 3-year total return. Barclays Agg refers to the Bloomberg Barclays U.S. Aggregate Bond Index.
• The 10-year U.S. Treasury yield fell 97 bps from January 1 through early August and bottomed out at just 0.50%. Against this backdrop, the Barclay’s Agg, a proxy for traditional core fixed income investments, generated a strong YTD return of nearly 8%.1
• Since August 4, however, the 10-year has risen 41 basis points while the Agg declined -0.91%, wiping out approximately 11% of the Agg’s YTD returns since August.1
• This year’s experience serves as a timely reminder of how sensitive long-duration assets are to changes in rates – both to the upside and down.
• Furthermore, as the chart shows, a good portion of Agg returns over the last ten years have been driven by price appreciation (falling rates). In fact, in today’s market, approximately 50% of the Agg’s trailing three-year return has been driven by price appreciation, nearly matching the highest it’s been since 1985.1
• Given today’s low rate environment, investors are stuck between a rock and a hard place. Low rates make life difficult for income-starved investors and leave little room for price appreciation. And perhaps most importantly, traditional fixed income assets expose investors to significant risk to principal if rates rise – even modestly.