Conventional Wisdom


By Monish Chhabra ǀ September 11, 2019

An essential part of many balanced portfolios, is the 10-year US government bond. It provides a yield, and tends to appreciate in price when stock markets go in distress.

Such has been the case over the last year. The stock markets have been volatile around the world, and the US treasury bonds have done well.

The following chart shows the 12-month rolling returns of an index that tracks these bonds.

The blue line shows the last 12-month total return (price and yield combined), at each point over the last 28 years from 1992 to 2019. The orange and the green lines show a top and a bottom trend line, respectively, forming a sort of band within which the returns fluctuate.

US 7-10 year Treasury Bond – Rolling twelve month returns (price and yield combined)

The average return of these bonds over the last 28 years was 5.4% per annum.

However, the returns varied over different 12-month periods. The best periods saw 15% to 20% returns, while the worst ranged from -5% to -10%.

Currently, we are in a golden period for such bonds. The rolling return over the last twelve months are in the high range of 15%-20%. On the chart, the current level of the blue line is above the top orange line, breaching the top of the band.

A Second Look

Another way to see what these bonds offer for the future, is their yield. This is the interest one would receive, every year, by holding these bonds to maturity.

The following chart shows the yield on the 10-year bond. This blue line shows the expected interest from the bond, at each point over the last 28 years from 1992 to 2019.

US Treasury Bond - 10 year yield

The average yield on these bonds over the last 28 years was 4.3% per annum.

The best time to buy them was in the November of 1994, when these bonds yielded 8%. Without risking the capital, one could get US-dollar return of 8% annually for the next ten years.

Since then, the yields have been coming down over the years. Currently, these bonds yield close to 1% per annum.

This is the lowest yield for this bond, in its history. Such a low starting point drastically dampens the expected return for a balanced portfolio, built traditionally with large allocation to such bonds.

Also, at this rate of interest, such a bond may not protect the buying power of its investor. If inflation over the next ten years, turns out higher than the yield, this seemingly safe investment could lose money in real terms.

From where we stand today, it seems hard for this conventionally wise investment to provide a conventionally satisfying outcome.

This write-up is for informational purpose only. It may contain inputs from other sources, but represents only the author’s views and opinions. It is not an offer or solicitation for any service or product. It should not be relied upon, used or construed as recommendation or advice. This report has been prepared in good faith. No representation is made as to the accuracy of the information it contains, nor any commitment to update it.