Bonds in the Long Run: A Different Apercu
However bad 2022 has been, it’s worth remembering that for a long period prior to 2022, bond holders had enjoyed strong returns year after year. A follower of John Bogle might well urge, “Keep the 2022 bond market in perspective. Take the long view. Forget 4-month rolls. How has your bond allocation performed over the long term?”
Everyone has a different idea of how “long-term” might most usefully be defined from the standpoint of the individual investor. Suffice to say, “twelve-month holding period” is not on the list. Ten years would meet the standard for some; twenty years for rather more. And since it has been possible to buy a Treasury with a 30-year maturity most of the time since the 1970s, that holding period might top the list. Then again, a 45-year-old who begins to throttle back on stocks and to add bonds, in the spirit of Target Date funds, probably should use a 50-year planning horizon.
Next, once bond performance is to be measured over multi-decade intervals, it becomes important to focus on real returns. Inflation has been too variable, especially since the lapse of the gold standard, for 30-year nominal returns in one century to be comparable to 30-year returns in another.
Last, it is useful to work with annualized returns (geometric roots). It helps in keeping the chart scale under control.
Here is a version of a chart that appeared in my market history paper (https://papers.ssrn.com/sol3/papers.cfm ... id=3805927
). It stops in January 2019, just before the pandemic and the Fed’s response sent safe bonds soaring (reminder, I use January to January returns to map onto 19th century compilers). Later in this post I’ll update it through 2022; this version helps to set the scene. For simplicity, it shows 20-, 30- and 50-year rolls to January of the year named, i.e., the annualized real return received by holders of long bonds over those intervals.
I found that 10-year rolls cluttered the chart (but see below); FWIW, and as will be seen later, 10-year rolls typically showed the same minima (e.g., 1982). In any case, almost all bonds in the index had maturities longer than ten years, arguing again for the longer rolls.
The first takeaway: 1982 marked a kind of world-historical low
in real returns on long bonds. Rolls ending that year show the lowest 20-, 30-, and 50-year rolling returns across the 200-year history, negative over each interval.
And that’s important: most investors active today (always excluding Taylor) have spent their entire investing career thinking that a rally from off a world-historical low point reveals the usual, customary and reasonable returns to be expected from investment grade bonds. Nonsense: it shows only what can happen during one of the greatest and longest bull markets ever seen in bonds.
The second takeaway: the decades following World War II show most of the worst rolls. With one exception, all of the negative annualized returns occur in this time frame. The exception, unsurprisingly, came just after WW I, courtesy of another great inflationary spike. In general, the 19th century was a much better time to be a US bond holder than the 20th century—until after 1982.
The period after World War II is unusual in another respect. Here is a chart showing ten-year rolls for bonds and also for stocks (real total return in both cases).
The years after WW II are the only period where stocks walloped bonds, 10-year roll after 10-year roll, decade after decade. At all other points in this history, over 10-year rolls either stocks and bonds soared together (1820s, 1850) or tanked together (1842, 1918), or moved fitfully and moderately in the same or different directions.
That unusual post-war period dominated early editions of the SBBI, setting up the narrative that stocks inevitably beat bonds over longer intervals, a case made most famously by Jeremy Siegel, as in the chart reproduced in the post upthread by Jo Money. (With better 19th century data, I was able to show that had Siegel written in 1942 rather than 1992, he could not have fielded that narrative from the historical data to that point; the long-term performance of stocks and bonds had been about the same from 1793 - 1942).
In the US, stocks beat bonds with a stick from 1949 to 1969; and thus the myth of a necessary, inevitable equity premium arose.
Stepping back: looking on the bright side, even over 20-year rolls bonds can sometimes achieve stock-like returns (as in 1835, 1886, 1940, 2002). But bonds can also clock negative real returns over 20-, 30-, and even 50-year intervals. It’s happened before.
Chilling thought to conclude the section: those no good, terrible, horrible real returns on bonds are clustered in the years following the last time long Treasuries yielded less than 2.0% ...
Updating through April 2022
For this chart I added dashed lines which extend the 20-, 30-, and 50- year lines to January 2020, 2021, 2022, and “2023” (treating returns through April of this year as if they were from a full year). The Vanguard Long ETF is used for the post-2019 returns (BLV). Again, these are real total returns.
I also added and extended 10-year rolls. An interpretation follows the chart.
The added data causes the rolls to rise on the chart through 2020, as the pandemic flight to safety pushed long bond yields to what may be generational lows. Then the 2022 decline caused all lines to turn lower. The reversal is moderate for the 20-, 30-, and 50-year rolls, where the last roll charted covers the periods from January 2003, January 1993 and January 1973, respectively. These lines remain far above the lows seen in the decades prior to 1982.
Results for the 10-year are a little different (with the last roll charted running from 2013 to “2023”). The annualized real return has dropped below 1.0%, after having peaked near 7.0% just a few years ago.
Conclusion: if your planning horizon spans 20 years or more, 2022 thus far might be considered just a part of the normal ebb and flow of fluctuating asset returns. You take the bad with the good.
But if your planning horizon, or holding period for long bonds, uses a 10-year metric, then you’ve seen a pretty dramatic reversal over the past few months. Through the start of this year your bonds had racked up a nice ten-year record; now, not so much.
I hope the charts help BH to see how very volatile real returns on long bonds can be over periods as short as ten years; and how very bad these returns can be, and for how long.
They that read the footnotes, they shall be saved; but they that pass over the appendices, they shall wander forever.