Are High Bond Yields Bad for Your Portfolio? 64 Years of Data Says Look at the Whole Picture

The 10-year Treasury yield just pushed above 5%, and the usual question is whether that's bad news for stocks. I went back to 1962 to find every stretch like this one. The better question turns out to be what high yields do to your whole portfolio, and the answer is more encouraging.

Where we are today

The 10-year Treasury yield rose above 5.15% on September 24, up about three-quarters of a percentage point from six months ago. The 30-year hit 5.44% this week, its highest level since 2004. Oil prices have jumped and inflation is still above the Fed's 2% target. The Fed has begun raising rates, and the market expects more increases over the coming months.

When yields climb like this, the headlines usually focus on the stock market. Higher rates make borrowing more expensive for companies and give investors a safer alternative to stocks, so it's a fair question. But most of our clients own both stocks and bonds, and higher yields affect each side differently.

What I looked at

I used daily data going back to January 1962 and found every trading day when the 10-year Treasury yield was at or above 5% and at least half a percentage point higher than six months earlier. That's the setup we have today. There were 2,654 such days, which group into 28 separate episodes. Today is the 28th.

For each of those days, I measured what happened over the next six months, one year and two years to three things:

• A 10-year Treasury bought that day, counting both the interest it paid and the change in its price.
• The S&P 500.
• A simple 60/40 portfolio: 60% S&P 500 and 40% 10-year Treasury.

Then I compared those results with what's typical: the median across every trading day over the same years, in all kinds of markets.

Finding 1: Bonds bought at high, rising yields beat their typical returns

This is the part that gets lost in the headlines. A 10-year Treasury bought during one of these stretches earned a median 7.2% over the next year, versus 4.6% in a typical year. Over two years it earned 19.2%, versus 9.9%. It was positive over two years 92% of the time.

Since 1990 the results were even steadier. Over two years, a 10-year Treasury bought in one of these stretches never lost money. The worst result was a gain of 9.6%.

The reason is simple math. When you buy a bond at a high yield, you get paid a lot of interest while you wait, and that interest absorbs a lot of price decline if rates keep rising. Here's what a 10-year Treasury bought at 5.13% (about where it traded on September 24) would return over the next 12 months, depending on where yields end up:

Yields would have to rise about three-quarters of a percentage point over the next year, to nearly 5.9%, before a buyer at today's rate loses money. That cushion is there whether or not rates have peaked.

Finding 2: Stocks struggled in one era, not the other

Across the full period, stocks did lag after these stretches. The S&P 500's median six-month return was 2.1%, versus 5.8% in a typical six months. But nearly all of that shortfall comes from one era:

• All years, 1962 to today: the median return was 2.1% over six months and 8.6% over a year, versus 5.8% and 12.1% typically.
• 1962 to 1989: stocks stalled. The median six-month return was −2.1%, and stocks were up only 45% of the time. By two years out, they had caught back up to about typical (13.5% versus 13.8%).
• 1990 to today: there was no real penalty. Stocks returned a median 17.3% over the next year, versus 14.1% in a typical year.

The difference between the two eras is inflation. In the 1960s through the early 1980s, rising yields usually meant inflation was getting worse and the Fed would have to keep tightening. Since 1990, rising yields have more often come with a growing economy.

While I'd prefer to see the post-1990 numbers play out, the current setup has more in common with the older era than the recent one: oil prices are up, inflation is above target and the Fed is raising rates. That's the case for paying attention to the bond side of the portfolio instead of assuming stocks will shrug this off.

Finding 3: The whole portfolio held up

Here's where it comes together. Across all 64 years, these were the median returns when the 10-year was at or above 5% and rising (with the typical return underneath):

Here's the 60/40 across all years first, then split by era:

• All years, 1962 to today: the 60/40 returned a median 7.4% over the next year and 16.8% over two years, versus 9.4% and 17.6% typically. Over two years that's close to typical, even though stocks alone lagged.
• 1962 to 1989: the 60/40 was roughly flat over the first six months (+0.1%), while stocks alone fell. Two years out, it had returned 16.1%, versus 13.0% typically, and it was positive 91% of the time.
• 1990 to today: the 60/40 returned a median 13.6% over the next year (positive 93% of the time) and 28.4% over two years, versus 10.6% and 20.3% typically.

Why is the all-years result a little below typical when each era beat typical? Most of these stretches happened in the 1960s through 1980s, when returns were lower across the board, so the combined figure leans toward that era. That's a quirk of the mix, not a sign that high yields hurt a balanced portfolio.

Every episode, side by side

Looking at the 27 past episodes one at a time tells the same story. Two years later, the 10-year Treasury was positive in 26 of 27. Its worst result was a 7.1% loss (starting October 1979). The S&P 500 was positive in 21 of 27, and its worst was a 37.2% loss (starting September 1972).

The clearest example: 2007

The last time the 10-year crossed 5% the way it just did was June 7, 2007. Over the next two years, the S&P 500 fell 34.0% (including dividends) as the financial crisis hit. A 10-year Treasury bought that day returned 18.4%. A 60/40 portfolio was down 13.0%, painful but a lot better than stocks alone.

The time before that, in April 2006, everything worked: stocks returned 16.3% over the next year, bonds 7.6% and the 60/40 12.8%. No one knows in advance which of those this will look like. The balanced portfolio is how you avoid having to guess.

What this means for your portfolio

High bond yields can weigh on stocks for a while, especially when inflation is the reason rates are rising. But they also set bonds up to earn more, and that's the part of the portfolio designed to carry you through a rough stretch in stocks. Historically, the two have balanced each other out.

• Yields near 5% are an opportunity. If you have cash sitting idle or bonds coming due, this is a good time to talk about putting it to work at these rates.
• This is when rebalancing earns its keep. If stocks wobble while bonds hold steady, trimming what's up and adding to what's down keeps your mix where it belongs.
• Nothing here calls for a big change. History is a guide, not a guarantee, and your allocation should reflect your goals, not the headlines.

If you'd like to go over how this applies to your accounts, reach out or grab time on my calendar and we'll walk through it together.

— Kevin