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How does recent fixed income performance compare to prior challenging periods for the bond market?

Rising yields created a tough slog for high-quality taxable bonds this year, setting the index up for a potentially negative return for 2021. The value of broad diversification into equities, credit, and tax-exempt bonds was clear.

S&P 500 lowest total returns for bonds by year

The uptick in long-term yields from an unprecedentedly low level has weighed on bond performance this year. Absent a renewed downturn in long-term yields before year end, 2021 will rank among the lowest return years for the broad taxable bond market on record. That may sound negative, but context is critical.

First, this year’s poor performance follows two exceptionally strong years for fixed income in 2019 (+8.7%) and 2020 (+7.5%). Second, as illustrated in the chart above, even the worst years for bonds illustrate their relative stability compared to stocks. Though this year ranks among the bottom for high-quality taxable bond performance (-1.5%), even the worst year resulted in a dip of about 3.0%. Moreover, opportunities to enhance returns boosted actual results for many investors in the past year. Investing with active bond managers and tilting portfolios toward tax-exempt municipals (+0.5%) and higher-yielding credit (+4.6%) may have lifted returns back into positive territory this year.

This recent experience again illustrates a key reason why bonds continue to provide diversification benefits and serve as a safety net for diversified portfolios. Even during their most challenging years, bonds hold up relatively well. Contrast that to equity markets which routinely experience much greater volatility and much more significant downside over the course of a cycle. It’s also not a coincidence that this return environment for bonds corresponded with a period of outstanding equity market returns, clearly illustrating their correlation and diversification benefits.

The bottom line? Despite the low yield environment, bonds still play an important role in diversified portfolios, providing a source of income, protection against equity market drawdowns, and dry powder to rebalance as opportunities are presented.

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 information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis non-factual 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.

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