Such bonds offered the certainty to investors of a guaranteed loss on maturity. They also claimed that bonds offered diversification against risky equities, an argument that provided the rationale for the hallowed 60/40 portfolio split between equities and bonds.īut in much of the developed world the yield on many government bonds before 2022 was negative in both nominal and real terms, which is a curious kind of risk-free rate. Moreover, this spectacular 40-year run created a new mythology of bond investing, along with a perversely misleading vocabulary.Īcademic economists and actuarial consultants declared government bonds were “safe” assets that delivered a risk-free interest rate. Yet it is important to bear in mind that the equity-like returns on government bonds in this golden period were a mixed blessing for investors. As today’s central bankers doggedly pursue interest rate policies dubbed “higher for longer”, many investors have taken a bet, so far unrewarding, on history repeating itself. So says the invaluable Credit Suisse Global Investment Returns Yearbook prepared by economists Elroy Dimson, Paul Marsh and Mike Staunton.
Over the 40 deflationary years to the end of 2021, the annualised real return on bonds in the world bond index was 6.3 per cent, not far short of the 7.4 per cent return on global equities over the same period. Central banks, led by the US Federal Reserve, launched a draconian response, pushing interest rates sky-high. The conditions for the greatest bond bull market in modern history were set in the 1970s, when inflation hit runaway levels.
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