Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 199

Unpacking the '30-year bull market' in bonds

The financial press regularly quotes someone referring to 'the 30-year bull market in bonds'. Often, they’re reporting the latest prediction that this amazing period of (alleged) bond market prosperity is about to come to a crashing end. This article reviews the history of bond yields, prices and returns to explain what the bond market has really done for the past few decades. This can help to understand what various future scenarios might actually mean.

The problem with characterising the past 30 years or so as a 'bull market in bonds' is that it’s not an accurate depiction. Reality simply doesn’t support the statement.

Always worth par on maturity

Most commentators speak of the long-run trend in US bond yields when they refer to the 30-year bull market. The following chart (courtesy of Macrotrends) gives a 54-year history of 10-year US Treasury bond yields.

Bond yields were at an all-time peak 36 years ago and have in recent years been at all-time lows. (The peak was in 1981 and the low point in 2012.) Commentators naively infer that bond prices must, therefore, be a lot higher because when yields fall, prices rise. Ipso facto, we’ve had a multi-decade bull market in bonds!

However, it’s wrong to simplistically turn a long-term change in yields into an on-going bull market. A simple question will help you understand why it’s not possible: when it matures next month, what will be the price of the May 2017 US Treasury bond that was issued in 1987 at par value of $100? If there’s been a 30-year bull market then surely this bond is now worth thousands of dollars.

That’s not the case. There are few things you can predict with confidence in financial markets, but that the May 2017 Treasury bond will mature at exactly $100 is certain. The following chart, courtesy of Bloomberg, shows the full history of the price of the May 2017 Treasury bond since its issue in 1987.

The price of this bond did increase early in its life, peaking at just under $150 value in 2003. So, you could say that there was a bull market over its first 16 years, albeit with some rather large ‘corrections’ in 1994 and 1999. There was then a clear bear market from 2003 to 2006 and overall the period from 1998 until 2012 looks more like a range trade in the $130-145 region. Since 2011 the bond’s price has been in rapid descent to the current level of just under $101. The remaining $1 above par will be discarded by the market over the next couple of weeks and it will pay holders at maturity the same $100 at which it was issued 30 years ago.

Since the definition of a bull market is a persistent increase in asset prices, the May 2017 US Treasury bond has not been in one for at least the past 14 years. This is especially so if you consider real, or inflation-adjusted prices. $100 is not worth as much in 2017 as it was back in 1987. Furthermore, the same could be said of every bond that has matured during the last 10, 20 or 30 years. They’ve all matured at par value. Not one bond has paid investors an inflated price. If that’s a bull, then I wouldn’t bother entering it in the Royal Easter Show!

More subdued over time

Now, let’s combine the trend in yields and prices to the history of bond market returns since the early 1980s. What we find is that the years of great returns are front loaded. There was a bull market in bonds at one time, but it was in the early years of this 30-year period. Since then, returns have been more subdued over time:

  • During the mid to late 1980s, rolling five-year returns from the US Treasury market were often above 15% pa and always in double digits.
  • By the 1990s, things had changed and returns were running in the 7.5–10% region.
  • Since the late 1990s, rolling five-year bond returns have been closer to 5% pa and, over the past half dozen years or so, investors have received in the region of 2-3% pa.

Astute readers will compare these return outcomes with the 10-year yield chart and notice something remarkable. When yields were high, so were returns! However, as yields declined, although initially this gave a boost to total returns, ultimately it resulted in lower returns.

Does that sound like a long-term bull market? Owners of bonds have made good returns in the past 30 to 36 years. But it’s been from the yields they’ve been paid, not from any long-lasting capital price appreciation.

What next for bond returns?

The long-run trend in declining yields appears to have ended about five years ago. Since then we’ve had two small ‘bear markets’, during the taper tantrum in 2013 and in response to stronger growth expectations in 2016. The latter has petered out, with Treasury yields back to the low end of their post-election range.

But what if we are in for a period of rising bond yields? If that happens, then investors with long-duration investments will experience potentially significant negative returns for a time. However, a sustained rise in bond yields will gradually result in rising bond returns in exactly the same way as the historical trend has been for falling yields to gradually reduce returns.

And along the way, whatever bond prices do in 2017 or any other year, every bond will pay back its par value at maturity (assuming no defaults). Never let the scaremongers divert your thinking from the simple mathematical reality of how bond markets behave.

 

Warren Bird is Executive Director of Uniting Financial Services, a division of the Uniting Church (NSW & ACT). He has 30 years’ experience in fixed income investing. He also serves as an Independent Member of the GESB Investment Committee.

RELATED ARTICLES

A journey through the life of a fixed rate bond

Are bond yields lower forever or is the Big Bang coming?

Briefly, on the role of government bonds

banner

Most viewed in recent weeks

Who's next? Discounts on LICs force managers to pivot

The boards and managers of six high-profile LICs, frustrated by their shares trading at large discounts to asset value, have embarked on radical strategies to fix the problems. Will they work?

Four simple things to do right now

Markets have recovered in the last six months but most investors remain nervous about the economic outlook. Morningstar analysts provide four quick tips on how to navigate this uncertainty.

Welcome to Firstlinks Edition 374

Suddenly, it's the middle of September and we don't hear much about 'snap back' anymore. Now we have 'wind backs' and 'road maps'. Six months ago, I was flying back from Antarctica after two weeks aboard the ill-fated Greg Mortimer cruise ship, and then the world changed. So it's time to take your temperature again. Our survey checks your reaction to recent policies and your COVID-19 responses.

  • 9 September 2020

Reporting season winners and losers in listed property trusts

Many property trust results are better than expected, with the A-REIT sector on a dividend yield of 4.8%. But there's a wide variation by sector and the ability of tenants to pay the rent.

Have stock markets become a giant Ponzi scheme?

A global financial casino has been created where investors ignore realistic valuations in the low growth, high-risk environment. At some point, analysis of fundamental value will be rewarded.

How the age pension helps retirees cope with losses

It's often overlooked how wealthier couples can fall back on the age pension if a market loss hits their portfolio. The reassurance is never greater than in a financial (and now epidemic) crisis.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 376

The US tech index, the NASDAQ, peaked on 2 September 2020 at 12,058 and three weeks later closed at 10,632. On the same days, Apple hit US$137.98 and then fell to US$107.12. These falls of over 10% and 20% seem high but both were simply returning to their early August levels. It's hardly a rout when a month's gains are given back. The bigger issue is whether such stock corrections will scare off the retail 'Robinhood' traders.

  • 24 September 2020
  • 2
Interviews

Interview on new technologies with more potential to grow

For many global tech companies, COVID has boosted their revenues and pushed share prices to all-time highs. We are on the cusp of amazing technical advances and there are plenty of new opportunities.

Shares

Five reasons why Tesla is the everything bubble

As fewer professionals actively research the merits of a company’s prospects, stocks become disproportionately driven by capital flows. Prices disconnect from fundamentals and there's no better example than Tesla.

Retirement

Three retirement checks for when you have enough

Not every retiree needs to gun for higher returns, but a conservative portfolio can court its own risks, especially with bond rates so low. But some retirees prefer to settle for a lower income.

Shares

Hide and seek: the FX impact on global equity investments

As more Australians tilt their investments to global equities, they often overlook the exchange rate risk and fees. The move from US57 cents to US73 cents in six months shows the unhedged impact.

Economy

When America sneezes, the world catches a ...

The recovery from COVID-19 is looking more like a K-shape, with some companies doing well while others struggle. The pandemic seems more akin to a black swan, exogenous shock than a structural downturn.

Retirement

How the age pension helps retirees cope with losses

It's often overlooked how wealthier couples can fall back on the age pension if a market loss hits their portfolio. The reassurance is never greater than in a financial (and now epidemic) crisis.

Sponsors

Alliances

© 2020 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.