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Bear Markets, Rising Rates & Intermediate-Term Treasuries

Bear Markets, Rising Rates & Intermediate-Term Treasuries

History Might Surprise You

Since the 1950s, there have been 9 bear markets brought on by a variety of issues. Some bear markets follow major political occurrences (formation of alliances, military actions, changes in financial regulations, etc.). Others are brought on by a combination of economic forces, rapidly rising stock prices and/or large-scale changes in investors' decisions (the dot-com and housing bubble bursts, for example). Perhaps most interestingly, a bear market may even be brought on by the social consensus of investors themselves due to something called "investor psychology."

¬¬¬U.S. Stock Bear Markets Since 1926

Start DateEnd DateLength in MonthsU.S. Stock Market ReturnsIntermediate-Term Treasuries Returns

1929-91929-113-33.08%3.37%

1930-41932-627-79.56%6.03%

1932-91933-26-29.82%2.06%

1937-31938-313-50.04%3.07%

1939-101940-58-25.72%3.93%

1941-91942-48-22.38%0.50%

1946-61946-116-21.76%0.33%

1962-11962-66-22.28%2.46%

1968-121970-619-29.25%2.63%

1973-11974-921-42.63%4.90%

1987-91987-113-29.53%2.38%

2000-92002-925-44.73%27.48%

2007-112009-216-50.95%15.60%

Averages12-37.06%5.75%

Source: Monthly returns data from Morningstar Direct from 1/1926 to 12/2016. Bear market defined as a drop of 20% or more in the US stock market. US stock market represented by Ibbotson SBBI US Large Stock TR USD index and intermediate-term Treasuries represented by IA SBBI US IT Gov’t TR USD index.

Why Does This Matter?

Again, I’m not suggesting that a bear market is imminent. But I am suggesting that we should be mindful of history. And we should also ask ourselves the question of how might intermediate Treasuries perform if equity markets take a breather. Layer on the fact that we are in a rising rate environment, let’s get more specific and ask how bonds have performed historically as rates are rising.

Would it surprise you to know that during a time of rising rates that 92% of the time bonds are positive over the rolling 1-year period and positive 100% of the time over the 3- and 5-year rolling return periods? Take a look:

Intermediate-Term Treasury Bond Rolling Forward Returns

BaselineRate Hike Cycle

Period1-Yr Rolling Return3-Yr Rolling Return (Annualized)5-Yr Rolling Return (Annualized)1-Yr Rolling Return3-Yr Rolling Return (Annualized)5-Yr Rolling Return (Annualized)

Period Count648624600190188188

Average Return6.9%6.9%7.1%5.4%6.7%7.4%

Positive Return Frequency91.4%100.0%100.0%92.1%100.0%100.0%

Source: Monthly returns data from Morningstar Direct from 1/1926 to 12/2016. intermediate-term Treasuries represented by IA SBBI US IT Gov’t TR USD index.

Stay Diversified

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