With interest rates so low, which bonds should I invest in?

With current interest rates so low, returns in the bond markets have been hard to come by. Let’s look at how previous low interest rate environments have affected bond returns and consider opportunities for diversification with higher-yielding fixed income securities.

Long-term Bond Returns and Interest Rates

Long-term bond returns have historically lagged interest rates – periods of higher interest rates have been shortly followed by periods of higher fixed income returns and periods of lower interest rates, such as our current environment, have historically been followed by lower returns.

The chart below shows interest rates and long-term government bond returns by decade from 1930 through the present.

Front of Chart

Long-Term Bond Return have Historically mirrored interest rates

As the chart shows:


Over the long term, interest rates and long-term bond returns have been closely correlated; in periods of low interest rates, returns in traditional government long-term bonds have also been low.

Today’s interest rates are similar to those of the 1940s and 50s. In this lower interest rate environment, you may want to consider shorter-term and higher-yielding fixed income securities.


Short-Term Bond Performance When Interest Rates Rise

Historically, when interest rates begin to rise, fixed income options with higher and/or floating interest rate payment have outperformed longer-term bonds.

The chart below compares several different types of fixed income securities during the last four times interest rates rose at least 2%.

Back of Chart

Non-Traditional Bonds, Bank Loans and Yield Bonds

As the chart shows:

During these rising rate periods, intermediate and long-term government bonds have not performed as well as other asset classes.
On the other hand, non-traditional bonds, bank loans, and high yield fixed income asset classes returned strong performance.




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