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Thursday, October 1, 2009

It's All About the Yield

Here is an easy concept that a lot of people don't seem realize to realize (based upon the number of times I'm asked the question).

What kind of returns can one expect on a going forward basis from a bond portfolio consisting of securities that do not default? Over the life of those bonds the answer is simply the yield of the portfolio.

While volatile as there are a number of components that affect rolling returns (interest rates, spreads, etc...), the chart below gets rid of that noise (and clearly shows the relationship) by showing the three year average of the yield to worst of the Aggregate index and 12 month forward returns.

Simple? Yes. But, a point easily forgotten by investors seeing the most recent 9% 12 month return of the Barclays Aggregate index after the massive rally in interest rates, government purchase of mortgage bonds, and credit rally (all from a starting yield to worst of just 5.3%).

Source: Barclays