This chart is one of my favorites that I’ve made in a while, as not only does it contain a lot of interesting information but I also learned a lot by making it. Here are a few of the most important takeaways:
1. At high interest rates the coupon is most important, and at low rates capital appreciation is king
2. Short and intermediate term bonds (typically capped at about 10 years) are much less sensitive to interest rates at all levels than long term bonds
3. Low-interest 30-year bonds are very volatile! In fact, the range of returns is similar to what you might expect from the stock market.
4. Note that the spread of total returns for long term bonds is not symmetrical. Because they are increasingly more sensitive with every drop in rates, for the same +/-1% change they actually have more upside than downside.
5. One thing that’s not obvious from the chart is that interest rate sensitivity declines as bonds age. A new 30-year bond will start on the red line. When it only has 15 years left, it has the volatility of the green line. And when it only has 5 years left it has the predictable tight range of the purple line. Just like people, bonds get less active as they mature.
But if you take only one point away from this post let it be this:
Because of convexity, bonds have way more income potential at very low or even negative rates than most people realize.
This is one of the more explanatory and informative reports I have seen on the bond markets and helps to explain the continued momentum driven move despite the fact nominal yields are at objectively unattractive levels. However, it is also worth considering that the most compelling arguments for the success of a momentum strategy almost always appear during the acceleration phase of a bull marketClick HERE to subscribe to Fuller Treacy Money Back to top