Bear in Mind?

Share on facebook
Share on twitter
Share on linkedin
Share on email

The yield on 10-year treasury notes has risen from 1.47% in June of last year to 2.22% recently, prompting many to wonder if the “inevitable” bear market in high-quality bonds is finally upon us. With interest rates expected to move higher in the coming years, many investors have avoided an allocation to intermediate and long-term bonds due to the inverse relationship between interest rate changes and the price of a bond. The typical Introduction to Finance textbook visually depicts this relationship with a teeter-totter showing how prices go down when yields go up, and vice versa. Perhaps it is the sheer simplicity of this relationship, or at least how it is described by many, that leads investors to make counterproductive tactical shifts within their fixed income portfolios.

While past performance does not guarantee future results, we offer the following chart, hopefully to provide some peace of mind for fixed income investors. When the term “bear market” is associated with bonds, which are supposed to be the safe part of an investor’s portfolio, the natural reaction is to think about the sharp corrections of 20%+ often experienced in equity markets. However, a bear market in bonds is typically much different and less extreme than a bear market in equities, and that is exactly what the chart below illustrates. The dark brown bars represent the annual returns of intermediate term bonds going back to 1926. The light brown area in the background represents the yield on 3-month Treasury Bills. The first observation is that returns were negative in only eight years since 1926. A second, and perhaps more important observation, is that the scale on the left axis only goes to -5% as the low. For intermediate-term bonds, not only have negative returns been infrequent, they have also been much less severe than what many think of when they hear the term “bear market.” The last observation is that bond returns were still positive as interest rates steadily increased from the 1930’s all the way through the late 1980’s.



Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Brighton Jones LLC), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained on this blog serves as the receipt of, or as a substitute for, personalized investment advice from Brighton Jones LLC.

To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Brighton Jones LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Brighton Jones LLC’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Brighton Jones is not affiliated with Facebook, Twitter, LinkedIn, Google+, YouTube or other social media websites and we have no control over how third-party sites use the information you share. Please remember that you should never communicate any personal or account information through social media and it is important to familiarize yourself with their respective privacy and security policies.