Since the start of 2019, yields have fallen meaningfully across the board, but particularly for long-term bonds. While the decrease in yields was favorable for fixed income returns this year, the contribution is likely to be less pronounced going forward.
The two- and 10-Year U.S. Treasury yields have fallen nearly 70 basis points (0.7%) since the beginning of the year. Falling yields can have a noticeable impact on bond returns in two ways. First, since long-term fixed income returns are largely driven by coupon payments, lower yields result in lower income in the future. Secondly, as seen in the chart above, current yields are closing in on the bottom of their recent ranges for a variety of issues. While rates could fall further, it’s unlikely that bond performance over the rest of the year will be able to match the solid returns since January (nearly 8% for the Bloomberg Barclays Aggregate through August 9).
Bonds have had a strong run this year, and should continue to provide the same primary benefits that investors have come to expect, providing a source of income and a strong source of diversification and risk mitigation for an equity portfolio. A further decline in interest rates would also boost their returns, but investors should understand how unusually strong the first half of the year was for bonds. We will address that next.
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