LONDON — The global bond market has been on unstoppable run for almost four decades, earning a real return of 856% since 1982, according to a report by Credit Suisse.
The Swiss investment bank, along with London Business School, analysed the real return of the world bond index since 1900.
From 1982 until the end of 2015, the return was 7.9% a year, despite periods of volatility.
“There were obviously setbacks, but world bonds gave positive real returns in 26 of the 34 years,” Credit Suisse said in the report.
A period of relatively stable economic growth, low inflation and advances in pricing and market technology combined to create a golden age for bonds. When financial markets looked wobbly, such as during periods since the 2008 financial crisis, central banks have stepped in to purchase hundreds of billions of government bonds, helping to propel the index even higher.
In the words of Credit Suisse, bonds have “produced equity-like performance, yet with much lower volatility in an apparent violation of the law of risk and return.”
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The past 35 years have been exceptional. Before the 1980s, bonds had a difficult past, especially during periods of high inflation and war. Bonds have fixed returns, in the form of interest, and so are generally shunned by investors when prices are rising.
Between 1900 and 1982, the average annualized real bond return across the 21 major economies was just 1.0% per year.
The question facing investors is how long this golden age will last. Credit Suisse said “extrapolating these high returns into the future would be fantasy.”
“They have arisen from non-repeatable factors, and future returns are likely to be far lower,” the analysts said. “More generally, this is a further example of the importance of looking at very long periods of history in order to understand markets. Even periods as long as three or four decades can be quite misleading if naively extrapolated.”