What Return Can Bond Investors Expect Over the Next 10 Years?

Low interest rates will have a dramatic impact on future returns. We investigate the impact this has on government bonds and show the power of starting yields

Dan Kemp 28 April, 2017 | 3:47PM
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Fixed income markets often look more complex than they need to be. Jargon-heavy terms like “duration”, “roll migration” and other curly names are undoubtedly important, but are very often secondary to simple fundamentals such as the starting yield.

The Easy Big: Knowing the Starting Yield

The starting yield has been an incredibly powerful determinant of future returns among government bonds. This is in part due to the fact that default risk is considered to be very low and thus the contributors to risk and return become simplified.

The below chart depicts the relationship between the starting yield and future returns from 1957 to today, including over 4,000 validation periods. It includes a diverse range of countries comprising the U.S., U.K., Germany, Canada, Australia, Belgium and South Africa, which is a meaningful collection of data that removes country-specific idiosyncrasies and demonstrates the benefits of a buy and hold approach in fixed income when the starting yield is high.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA

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