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Investors Facing Decade Of Flat To Negative Bond Market Returns

Published 03/16/2017, 01:45 AM
Updated 07/09/2023, 06:31 AM

There is a whole generation of investors that think that bonds and bond funds, and bond ETFs are “safe”, i.e. low risk of loss, modest returns, etc. And that has been true for a while.

In the late 1990’s, the S&P 500 returned 143% from 1995 to December 31, 1999. Sir John Templeton said at one point in the late 1990s that investors were facing a decade of flat returns in the equity market and he turned out to be exactly right.

The total, cumulative return for the S&P 500 following the late 1990s, from January 1, 2000 through December 31, 2009, was 12.5, which roughly averaged just 1%-1.5% per year. The point of this is that no one is talking “mean-reversion” for the global bond markets, or even flat returns.

Several times a year I do a conference call with a group of small advisors like myself, and we discuss historical bond returns: one thoughtful advisor doesn’t think fixed-income returns are “mean-reverting” since inflation isn’t mean-reverting, a perspective I never considered. However, given the results of Presidential election and the change in Congress to a “pro-economic-growth, pro-business” agenda, both inflation, and more importantly “reflation” are being reconsidered.

The other aspect that investors don’t consider is that it isn’t necessarily inflation, but “inflationary expectations” that impact bond prices and interest rates.

So much of this depends on the fiscal policies being debated in Congress today. From health care reform, to comprehensive tax reform, to cash repatriation, all these “reforms” will change incentives, and once you change incentives, economics takes its proper course.

In addition, the Developed European Markets and the Emerging Markets are starting to show signs of improvement, economic stirrings that haven’t been seen in 10 years. The US and the rest of the globe have been caught in this post-2008, dis-inflationary spiral for 8-9 years now, and that is beginning to change.

It will be interesting to see what crude oil does – Energy still matters to inflation measures.

Watch the 10-year Treasury yield: the levels “everyone” is watching are 2.62% and then the December ’13 high of 3.04%. Through these levels, particularly the ’13 high, balanced portfolios and bond funds will get interesting.

To be clear, I was wrong about the “return-to-global-growth” theme for most of the post-2008 era. Client balanced and bond accounts hold some “strategic” funds which have “go anywhere” biases, but the accounts have primarily been in cash, with a position in the ProShares Short 20+ Year Treasury ETF (NYSE:TBF), or the unlevered Treasury short.

It is puzzling that no one thinks the bond market can see real pain—like the stock market in the early 2000s or 2008. Maybe not to that degree, but we could see a longer period of flat returns in my opinion.

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