Not all 30-year periods are quite as spectacular for bonds as have been the last 30. From Ben Levishohn’s Oct. 2nd WSJ article, “How To Play Rising Rates”:
Bond yields have fallen for most of the past three decades. A $1,000 investment in the U.S. government debt in 1980 would be worth about $12,970 today, according to the Ryan Labs Treasury Composite Index. Treasury prices, which move in the opposite direction of yields, have surged 9.3% this year alone.
Now consider a different era: 1949 through 1979. Over that 30-year span, a $1,000 initial investment in Treasurys would have turned into a far humbler $2,950. That’s because yields soared during the period; by 1980 the yield on the 10-year Treasury had reached a record high of nearly 16%.
Given that Treasury yields have since plunged back down to 2.5% or so, how much further can they fall?
It wouldn’t take much of a rise in rates to pose problems for investors. A one-point jump in Treasury yields would translate to a 5% loss for the 10-year Treasury note and a 12% drop for a 30-year Treasury. Many strategists are predicting 10-year Treasury rates above 3% over the next year.
From a relative strength perspective, bonds continue to have pretty good relative strength (although real estate and commodities have better relative strength). However, now is the time for investors to make sure that their asset allocation has the flexibility to handle a rising-rate environment.
