Yields on U.S. Treasurys, generally considered a safe go-to investment especially in volatile times, have been sliding for the past week as prices have risen. And one strategist says an era of dangerously low returns appears to have arrived for the bond market.
Albert Brenner, director of asset allocation strategy at People’s United Bank, says that returns on U.S. 10-year Treasurys are looking bleak compared to the last three decades, thanks to a prolonged environment of ultralow rates coupled with the likelihood that rates will finally rise once the Federal Reserve increases the federal funds rate.
“Investors have become accustomed to getting positive returns on bonds,” Brenner said in a phone interview. “That’s not what we’re facing going forward.”
From September 1981 to July 2012, bonds returned more than 6 percent a year in annualized returns adjusted for inflation, Brenner said. But as rates begin to rise, investors will be left holding low-yielding bonds that lose market value over time as benchmark rates increase.
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“That could put investors back in the position of what they lived through from 1950 to 1980,” Brenner said, looking at a period from May 1954 to August 1981 where bonds had an average annualized return of 4 percent as rates rose. However, investors actually saw negative returns of 1 percent, adjusted for inflation.
“We’re at virtually historically low points,” he said. Before, “you did have that whole period of rising yields over long-term secular trends, and you did get positive returns on bonds, but after inflation you got next to nothing.”
More recently, bonds returned an average of 0.4 percent between August 2012 to October 2015. And while this isn’t a reason to write off bonds, Brenner said, investors should temper expectations to “very, very modest” returns from here on out.
Despite the prospect of lower yields, Todd Gordon of TradingAnalysis.com also said bonds still have an important place in an investor’s portfolio.
Looking at a long-term chart of the S&P 500 and the U.S. 30-year Treasury price, Gordon said the two have traded in lockstep with the exception of the 2000 and 2008 crashes. Given the correlation, investors should stay diversified in their assets, he said.
“I think a nice mix of stocks and bonds is still the right recipe,” Gordon said Wednesday on CNBC’s “Trading Nation.”
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