Portfolio construction

Why higher yields may be good for many retirement investors

November 17, 2023

Line chart compares the performance of bonds, using the Bloomberg U.S. Aggregate Bond Index, under two scenarios: First, yields staying constant from September 30, 2023, for the foreseeable future; and second, yields never moving. Initially, the second scenario outperforms the first. However, the results reverse starting just before 2030, with bonds outperforming under the first scenario as long-term investors benefit by reinvesting and compounding at higher yields.
Bar chart shows how bonds eventually produce positive returns when interest rates are elevated. Returns are initially negative due to low prices and high yields. But as long-term investors reinvest at higher yields, their returns compound at higher levels, and they start to get compensated for capital losses. Bonds move into positive territory after five years, as the positive income returns are no longer more than offset by negative price returns.
Chart plotting the yield of the 3-month Treasury bill (as a proxy for cash) and the return of the Bloomberg U.S. Aggregate Bond Index (as a proxy for bonds) compares both asset classes between January 31, 1978, and September 30, 2023, and finds that bonds outperformed cash more than 90% of the time over five-year periods. The five-year returns of the Treasury bill outperformed those of the bond index from February 28, 1978, through October 31, 1979. During that period, the five-year cash returns ranged from 11.2% to 11.5%, versus 8.1% to 10.2% for bonds. But from November 30, 1979, through June 30, 2017, the five-year bond returns outperformed those of cash. During that period, the five-year cash returns ranged from 0.1% to 11.5%, versus 1.2% to 20.3% for the bond returns. Since the period from July 31, 2017, through October 31, 2018, the five-year cash returns ranged from 1.1% to 1.7%, mostly narrowly exceeding the bond returns, which ranged from –0.5% to 1.3%.


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