Many investors think of bonds as a portfolio’s defense. Since 1980, U.S. 10-year treasury bonds have performed like the vaunted 1985 Chicago Bears defense, creating offensive-like total returns of more than 8%, which had investors dancing the Super Bowl shuffle.
This impressive performance came from a blend of interest income and price appreciation from falling rates.
As we all know, though, victories from seasons past are no guarantee of future success (as all Bears fans still waiting for another championship will remind you). After 35 years, many investors are concerned that the bull market in bonds is getting a bit too old to play effective portfolio defense while continuing to deliver strong returns.
Rates are on a trillion-dollar race to the bottom
The bond bears are concerned interest rates could move higher or stay flat, creating holes in many portfolios since bonds would no longer be a source of portfolio returns. The bulls think interest rates will continue to fall as they did in Japan 15 years ago, which was to the benefit of Japanese bond investors.
However, the slow- to no-growth environment that lower interest rates created was a terrible environment for Japanese stocks. Now interest rates are moving into negative territory and Japanese investors are facing not just a “lost decade,” but what is becoming a “lost half-century.”
Despite the consequences experienced by the Japanese economy, many countries around the world are following a similar playbook that kicked into high gear after the volatility of early 2016. This has created a historic increase in the amount of money investors have lent to governments at negative rates. In fact, as of the end of May 2016, almost 40% of all global government bonds were forcing investors to pay for the right to lend money.