FIXED INCOME: BETTER DAYS AHEAD

“No matter how dark the night, somehow the sun rises once again and all shadows flee.” — Vern McLellan

Bond investors have weathered a long proverbial storm of poor returns. Over the past ten years, bonds, as represented by the Bloomberg U.S. Aggregate Bond Index (the “Agg”), have averaged a paltry 1.3% annual total return. Over the past five years alone, the Agg has declined nearly 3%. Given that fixed income has traditionally been a relatively stable contributor to portfolio performance, this extended period of disappointing returns has prompted several questions in our inbox lately: “What happened?”, “Why even own bonds?”, and “What do we expect going forward?”

What happened?
Over the past several years, we have transitioned from a historically low interest-rate environment to a more normalized one. For context, the U.S. 10-year Treasury yield was approximately 1.7% ten years ago and fell as low as 0.5% in 2020. Today, it is near 5%. As interest rates rose, the prices of existing bonds declined, weighing on bond portfolio total returns.

Why own bonds?
That is the natural follow-up question, and there are several reasons. First, fixed income can serve as an effective portfolio diversifier, helping to mitigate some of the volatility associated with equities. Second, bonds can provide a relatively steady stream of income that equities may not consistently provide.

Ultimately, we believe a portfolio’s fixed income allocation should be aligned with the investor’s risk tolerance, liquidity needs, time horizon, and overall financial objectives.

What do we expect going forward?
Perhaps the most important point to highlight is that bond investors are starting from a much higher yield environment today than they were five, ten, or fifteen years ago. As the chart below illustrates, 10-year forward returns for bond portfolios, as represented by the Agg, have historically been strongly correlated with starting yields. With yields near 5%, the outlook for future bond returns is meaningfully more attractive than it was when yields were near historic lows.

After a challenging decade, the setup for bonds looks considerably different than it did just a few years ago. Higher starting yields have restored a more meaningful income component to fixed income and, in our view, make the asset class an important consideration for well-diversified portfolios.

Sources: Bloomberg and SEIA. Monthly data: September 30, 1976 – August 31, 2026.