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Falling yields have been a strong tailwind to bond performance this year, but investors should temper their expectations for future returns.

Yield Range Main

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.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.