April 10, 2023
In the same way that holding an individual bond to maturity could result in earning its starting yield as its annualized return, holding a diversified portfolio of bonds could result in a similarly high degree of return predictability. In the chart, using data going back to January 2000, we demonstrate a strong relationship between the starting yield of the Bloomberg US Aggregate Index and its 5-year forward annualized total return. Taking advantage of compelling starting yields in 2023 and relying on the reassuring evidence of bond math could offer the potential for attractive longer-term returns, with lower volatility than equities.
A strong relationship between starting yields and forward total returns
Bloomberg US Aggregate Index (January 2000 – February 2023)
Macquarie Asset Management. *As of 2/28/23
What this means for investors
Bond yields have risen to their highest levels since 2008, creating what we view as an attractive entry point for investors. Additionally, we believe that an actively managed approach using traditional “core” investment grade sectors along with higher yielding “plus” sectors may offer the potential for even greater total returns.
Investing involves risk, including the possible loss of principal.
Past performance does not guarantee future results.
Nothing presented should be construed as a recommendation to purchase or sell any security or follow any investment technique or strategy.
The views expressed represent the investment team’s assessment of the market environment as of March 2023, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice.
Market risk is the risk that all or a majority of the securities in a certain market – like the stock market or bond market – will decline in value because of factors such as adverse political or economic conditions, future expectations, investor confidence, or heavy institutional selling.
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Fixed income securities and bond funds can lose value, and investors can lose principal as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt. This includes prepayment risk, the risk that the principal of a bond that is held by a portfolio will be prepaid prior to maturity at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate.
High yielding, non-investment-grade bonds (junk bonds) involve higher risk than investment grade bonds. The high yield secondary market is particularly susceptible to liquidity problems when institutional investors, such as mutual funds and certain other financial institutions, temporarily stop buying bonds for regulatory, financial, or other reasons. In addition, a less liquid secondary market makes it more difficult to obtain precise valuations of the high yield securities.
The Bloomberg US Aggregate Index is a broad-based benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.
Charts shown throughout are for illustrative purposes only and not meant to predict actual results.
Chart is for illustrative purposes and is not representative of the performance of any specific investment.
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