Despite all the craziness in the equity markets in 2020, bonds have largely done their job of reducing overall portfolio volatility. Most sectors of the bond market have actually done very well and have aided in portfolio returns year-to-date.

The advisors in our firm meet quarterly as an investment committee. Besides portfolio risk management and fund selection due diligence, one of the most crucial discussions that stem from this meeting is the future expected rate of returns. Future expected returns play a big role in the individual retirement cash flow planning scenarios we discuss with clients. Based on the current climate and metrics used for gauging expected returns- a significant part of the return equation that could really serve as an anchor this next decade is bonds.

Since the beginning of 1979, the Bloomberg Barclays Aggregate Bond Index has returned 7.36%. That is not a typo, over 7% returns the past 40+ years! Most investors would take that return year over year with a fraction of the risk that comes with the stock market. The past thirty to forty years have been the best bull market for bonds in our country’s history as interest rates dropped from the mid-teens highs of the 1980s to today’s lows. As a quick reminder, bond prices are inverse of interest rates, and as rates plummeted over the last forty years, bond prices increased- making the higher-yielding older bonds more valuable and expensive than newer, lower rate bonds.

Bringing this back to recent history and looking at the Federal Reserve’s monetary policy can provide us a good road map on future fixed income returns. During the Great Recession, the Fed lowered rates to zero where they stayed until December 2015. From December 2015 through December 2018, the Federal Reserve voted to increase the Federal Funds rate nine times until the rate reached the range of 2.25-2.50% in December 2018. Other rates and yields followed directionally during this climb to the fall of 2018. By Halloween 2018, the 10-year Treasury Yield had reached 3.22% (an 8-year high), and 30-year mortgage rates were near 5%. However, if we look closer at total returns for the aggregate bond index from 2015-2018, we realize rising rates were at the detriment of bond total returns. The Vanguard Total Bond ETF (BND), that tracks the Bloomberg Barclays Aggregate Bond Index, had an average return of only 1.62% over those four years.  While the climb for higher rates hurt short-term returns, it is positive thing long-term for bondholders, many of which include retirees, because they will get paid more in the long-term on the money they are lending to government or corporations.

What has happened since the fall of 2018 to change this narrative? First, Q4 of 2018 saw the first 20% drop in the stock market since 2011 as fears mounted over trade wars/tariffs, a slowdown in China, and a housing slowdown. Even as the stock market bounced back in Q1 of 2019, trade wars concerns and fears of the end of a historic bull market quickly mounted. Investors sold stocks and fled to safer, more conservative bonds. In July 2019, the Federal Reserve agreed to reverse course and cut rates for the first time since 2008. They cut rates two more times in 2019, and as we entered 2020, there were further expectations of gradual rate cuts over the coming years. Shortly after the calendar flipped to 2020, the COVID-19 pandemic spread worldwide while simultaneously disrupting global economies. As a response to the COVID pandemic, the Federal Reserve took drastic measures and made two emergency rate cuts down to zero over two weeks in March 2020.

The downward pressure over of rates over the last 22 months, coupled with stock market concerns and increased demand for bonds has led to a short-term boon for bond investors. In fact, the aggregate bond index returned almost 9% in 2019, which was the best year for bond returns since 2002. Through August 17th, the Bloomberg Barclays Aggregate Bond index is again up almost 7% on the year. As I mentioned at the outset, bonds have been additive to portfolio return this year despite all of the stock market volatility. However, we are now sitting near all-time lows for the 10-year treasury and with the Federal Reserve rate at zero. The 10-year treasury is currently yielding approximately 0.69%. A blended bond portfolio, like that of BND, holds some lower credit, higher-yielding investment-grade corporate bonds and municipal backed securities. Thus, our expectation of total bond returns over the next five to ten years is somewhere in the 1.25-1.5% range. If interest rates stay low, bondholders will be subject to the low cost for borrowers in the form of lower dividends. When interest rates eventually increase, it will be a painful climb upwards (see 2015-2018) as bond prices drop. Armed with this information, we need to set investor’s expectations that average annual total bond returns certainly won’t be what they were the past 40 years or even what they have been over the past ten years given today’s historically low interest rate environment.


  • Data released last week showed retail sales recovered to pre-pandemic levels in July, as the 1.2% month-over-month increase marked the third consecutive rise. Consumer spending accounts for roughly 2/3rds of overall economic activity, with retail sales comprising a large portion. There are some concerns that the ending of the $600/month enhanced unemployment benefits could be a headwind in the coming months, despite an executive order to replace about half of the benefit. In other positive economic news, industrial production, which measures the output from manufacturers, utilities, and miners, also increased for the third consecutive month. Finally, the initial jobless claims figure fell below 1 million for the first time since mid-March.
  • As of August 7th, 90% of S&P 500 companies have reported results for the second quarter. 83% of companies that have reported have beat expectations. The blended earnings decline, comprised of the results from companies that have reported and the estimates for those that have yet to report, is -33.8% for the quarter. The initial estimates for the earnings decline was -44.1% as of June 30th. The improved results of reported earnings versus initial estimates has been a tailwind for the stock market.
  • Later this week, we will get the minutes from the recent FOMC meeting (Wednesday), initial and continuing jobless claims (Thursday), and the Markit service and manufacturing PMIs (Friday).



  • U.S. Stocks are Valued More than Almost Half of Global Economic Output (Sentiment Trader)
  • Another Roaring Twenties May Be Ahead (Ed Yardeni)
  • Eight High Frequency Indicators for the Economy (Calculated Risk)


  • Which Investments Benefit From a Weaker Dollar (AWOCS)
  • 500,004 Reasons I’m Not Buying Gold (


  • Looking to Refinance? Those Rock-Bottom Mortgage Rates Aren’t for You (WSJ)
  • The NBA Playoffs, Brought to You by Kawhi Leonard (WSJ)


Source: Morningstar Direct.

Source: Morningstar Direct.



Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)


Source: MarketWatch

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Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
  • BSBA, University of Nebraska, Lincoln, NE

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