How to Predict the Next Decade's Bond Returns

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How to Predict the Next Decade's Bond Returns

Post by Tyr0ne » Mon Mar 10, 2014 7:37 pm

Great article in the WSJ today.

I am a bit confused though. Does this principle apply differently when applied to individual treasury bonds vs a treasury bond fund? Is seems it would, as the article states:
the entry yield on the 10 year Treasury explains 92% of the annualized return an investor would have earned over the subsequent decade had he or she held the bond to maturity and reinvested the coupon payments at prevailing rates.

Since holding individual treasuries is impractical for many of us, I wonder how the results change when applied to bond funds.

I also wonder how this principal would hold up when applied to much shorter or much longer maturities.
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Re: How to Predict the Next Decade's Bond Returns

Post by docneil88 » Mon Mar 10, 2014 8:14 pm

The title of the article is "How to Predict the Next Decade's Bond Returns: Current Yields Are a Good Indicator of What You Will Earn Over Time" by Chris Gay, WSJ, March 3, 2014. It's brief, but makes some important points. The quote in the original post is a paraphrase of John Bogle. If you want to be even more sure than 92% of what you'll make over 10-years in nominal terms, then buy 10-year U.S. Treasury zero-coupon bonds. Then you won't have to worry about the interest rate at which you reinvest yearly coupon payments, because such bonds do not have periodic interest payments, or so-called "coupons". Best, Neil

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Re: How to Predict the Next Decade's Bond Returns

Post by ogd » Mon Mar 10, 2014 8:25 pm

What surprises me about the quote from the OP is that it's not closer to 100%, given the premise of holding to maturity. It might actually be a misquote in that respect. But, to answer the question, note the paragraph right below:
wsj wrote:Similarly, the entry yield on the Barclays U.S. Aggregate Bond index (of investment-grade U.S. bonds) explains 90% of its 10-year returns for the years 1976 to 2012, says Tony Crescenzi, a portfolio manager and strategist at Pacific Investment Management Co.
The Agg works like a bond fund and it's what Total Bond Market tracks, extremely well too. So this reasoning applies to TBM and other passive funds presumably - to eliminate the possibility of a manager making a bad call, like Pimco's has been known to do. Basically, the bond market is really good at predicting itself.

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