Note: Vanguard's, Ben Hammer will be joining Tom to discuss the proper use of bonds in a portfolio during our class, Talking Real Retirement on October 25, 2014 in Bellevue, WA. Sign up for this free class.
U.S. bond yields have been below their historical long-term averages for some time now. But history has shown that just because yields are low doesn't mean that they have to move higher.
At the end of 2010, the market believed yields were at such low levels that a significant rise was in the offing. The blue line in the chart below shows where the market expected U.S. Treasury yields to be three years down the road (as indicated by the so-called forward yield curve). For some maturities, those expectations implied that yields would more than double.
Bond yields rarely move as expected, however. The green line in the chart shows that Treasury yields at the end of 2013 were well below market expectations. In fact, Treasury yields at the end of 2013 were even lower than where they had been three years earlier.
While the current low level of yields implies slim returns from bonds in the future, investors should keep in mind that it remains just as hard today as it was in 2010 to say where yields will head next.
- All investing is subject to risk, including the possible loss of the money you invest.
- Investments in bonds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
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