Wait ... bonds aren't supposed to beat stocks!

Nov 8, 2011

Over the past 30 years, U.S. Treasuries have out-performed the stock market. Bloomberg's Cordell Eddings reports the last time that happened was 150 years ago. What's going on?

On this week's Money Matters, financial commentator Greg Heberlein says this is a rare event and not "the new normal."

Statistics for the 20th Century show stocks earning 9 percent a year, with Treasury bonds gaining 3 percent. That's a sharp contrast from figures for the past 30 years – 11.5 a year for bonds, 10.8 for stocks.

Greg is certain that reflects a dramatic and total reversal since 2008. Stocks have declined and bonds have boomed. In 2008 alone, stocks fell 37 percent while bonds gained 27 percent. The interest rate on 10-year bonds in the past four years has fallen by more than half.

The market crash

Since bond prices gain when yields fall, that's a remarkable gain in a business in which a tenth-of-a-percent move is huge. Since the crash, nearly a half-trillion dollars has left stocks. More than $700 billion was added to the bond market.

The market crash, the rise in the US deficit, gridlock in Congress and, most important of late, the lack of a resolution in Europe's economic woes all are crises that have driven investors away from risk and into safety.

How safe are bonds? If the world's woes ease, interest rates will rise. That means bonds offering lower interest rates will be less welcome, depressing prices on the older bonds. If you hold until maturity, you'll still get your original investment back. But if you must sell early, you're almost certain to get back fewer dollars than you put in.

Can bond returns continue to rise?  Yes.

Will they? With rates at or near all-time lows, it seems even lower rates and better returns are less likely, or at least limited?

Get 'em both

A common Wall Street phrase is regression to the mean. That means historical averages will hold sway eventually.  Investors might consider some position in bonds or bond-like instruments. In Greg's own portfolio, the stock-to-bond ratio is 50-50.

It's not a question of whether you should put your money into stocks or bonds. Instead, this serves as yet another reminder to include both of them in your portfolio, so you don't have all of your financial eggs in one basket.

Money Matters” is a KPLU feature covering the economy, investments and more. The feature is published here and airs on KPLU 88.5 during Morning Edition and All Things Considered on the second and third Tuesdays of the month. It also airs on Weekend Saturday Edition.