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
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)
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.
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