Markets & Economy
Ken Volpert on the current bond landscape
April 15, 2013
Amy Chain: Ken, I'd like to come to you and have you tell us a little bit about what's going on in the bond market today, the current landscape of the bond market, and maybe what might be ahead for us.
Ken Volpert: Sure, I'll be happy to, Amy. So we've been through just kind of going—try to get up maybe to 10,000 feet, and kind of look at where we've been over the last number of years. Leading into 2007, 2008 there was a lot of growth in the economy that was really driven by a lot of borrowing, a lot of excess borrowing. As you recall there was a lot of people taking equity out of their homes and consuming based on that. So there was a lot of leverage in the economy that led to some growth during those years, but ultimately it was too much leverage that was not really sustainable.
In 2008 with the problems that happened with some of the financial institutions led to a deleveraging cycle. Basically, an increase in savings by consumers, selling of assets by financial institutions, all of which kind of created the recession, a very deep recession that led to very large government deficits to keep the economy going. But also led to the Federal Reserve doing this quantitative easing program, which is basically where they've been buying up to now about $2 trillion of assets. What that's done is push down interest rates lower and lower, and actually has created some more, a little bit more inflation. And we've inflation about 2–2.25% over the last number of years.
So this financial repression is really what we're seeing right now, where we have interest rates that are below the inflation that we're realizing, and that's kind of what people are struggling with I think on the bond side.
I have a graph that maybe we can bring up right now, but it shows the historic yield to maturity, which is the yield that you get when you're investing in a bond to the life of the bond that includes not only the coupon but to the extent that it's bought below the price of par, or price of 100, you're going to get some return coming from that. If you pay above 100, you're actually going to lose some return, but it's netting those two together over the life of the bond to give you an estimate of what the yield is going to be.
What you see on the blue line is the yield to maturity historically, and if you look at the orange line you're going to see what the return is for the next 10 years. So what this graph is really communicating is that the yield to maturity right now is a really good estimate of what you're going to get over the next 10 years in this investment. It's really been a very reliable indicator. So it gives you a very good approximation of what the return is going to be.
Right now that yield, or as of December 31, that yield was 1.74% yield for the whole U.S. bond market, investment grade, which includes Treasuries, mortgages, investment-grade corporate bonds.
So investors looking forward should expect that that's the kind of return you're going to get: 1.7% to 1.8% return over the next 10 years. So that's maybe a good helpful framing, I think, of the discussion that we're going to have over the next hour.
All investments are subject to risk, including the possible loss of the money you invest.
Bonds and bond funds 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.
This webcast is for educational purposes only. We recommend that you consult a financial or tax advisor about your individual situation.
© 2013 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.
An overview of bond performance
Bond yields aren't what they used to be for a number of reasons. Ken Volpert, head of the Vanguard Fixed Income Group, gives an overview of the financial and economic factors influencing yields and looks ahead to what's in store for bonds.
Other excerpts from this webcast:
- Asset allocation and disciplined rebalancing
- Understanding bond prices and dividends
- The role of an international bond fund in your portfolio
- Spending from your portfolio: Total return versus income
- All investments are subject to risk, including the possible loss of the money you invest.
- Bonds and bond funds 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.
- This webcast is for educational purposes only. We recommend that you consult a financial or tax advisor about your individual situation.