Should You Maintain an Allocation to Bonds When Current Rates Are Low?
The performance of bonds is related to movement in interest rates. Those two phenomena are related—that much we know. How tightly they are related is a pertinent question at this point in time.
This article reviews how interest rate movement and bond returns have been related to each other since 1948. In addition, bond performance is considered in the context of an overall, multi-asset portfolio and not simply as a stand-alone asset. Finally, the performance of various portfolios in the “distribution phase” is examined, the phase when money is being systematically withdrawn from a portfolio. Bonds are typically included in distribution portfolios.
The Road Behind
Over the past 65 years (1948–2012) interest rates have risen, and then fallen. During the 34-year period 1948–1981, the Federal Reserve’s discount rate increased—not every year, but as a general trend. In 1948, the Federal Reserve’s discount rate was 1.34% and by 1981 it was 13.42% (see Figure 1). During this time frame of rising interest rates, the 34-year average annualized return for U.S. bonds was 3.83%. The year-to-year performance of U.S. bonds is represented by the vertical bars. U.S. bond performance is represented by intermediate-term U.S. government bond returns from 1948 to 1975 and the Barclay’s Capital Aggregate Bond Index returns from 1976 to 2012.
...To continue reading this article you must be an AAII member.