Quick Bites | The Rally in Bonds

Bond markets have staged an impressive rally over the past few weeks. Ten-year US Treasuries have seen their yield decline from 4.62% at the end of May to 4.24% on 17 June. In Australia, we’ve gone from 4.52% on the ten-year bond to 4.25% over the same period. The rally in bonds has been driven by two primary factors:

1. Better readings from the latest inflation data.
2. Signs that economies are slowing, especially in labour markets where “bad news is good news” – i.e. a slightly higher unemployment rate would allow central banks to commence the pivot to rate cuts.

The chart below categorizes the annual total returns of the US 10-year government bond from 1962 to 2024, taking into account capital gains or losses as well as the coupon (yield). The years are organised based on the percentage change in bond returns – from less than -20% to over +30%. Each block represents a specific year within these return ranges, illustrating the variability and trends in bond performance over time.

We can see that over the last 62 years, the US 10-year government bond has experienced a wide range of total returns. Exceptional total returns exceeding +30% in the early 1980s were driven by high interest rates and their notable declines, while inflationary pressures and rising interest rates marked a period of negative returns in 2022. 

As of 2024, total return has fallen to the -5 to 0% range, weighed down by relatively higher bond yields influenced by inflationary risks and the US Federal Reserve’s rate-cut pushbacks. However, these higher yields also provide larger cash flows that can offer some support to bond investors.

Source: MacroBond