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  • Writer's pictureBrady LaRoe

Bonds Compete with Stock Returns

As interest rates continue to rise, the bond market is beginning to catch up to the stock market. US 1 year treasury bonds have nearly met this year's returns in the S&P 500, making them a significantly more competitive option during the current volatility of the stock market.

Just a year ago today the 1 Year Treasury bond returned 1.08%. Since then bond yields have been increasing significantly, and the current yield has jumped to 5.05%.

The closing gap between stock returns and bond returns makes bonds a very attractive offer to investors. The bond market is much less risky than the stock market, especially Treasury bonds, which are guaranteed to be paid back by the federal government. The only case where these bonds wouldn’t pay back is if the US government defaulted on its debt - a highly unlikely scenario.

The increase in bond yields is a stark change up from the past decade of Treasury bond returns due to low interest rates. Since 2007, the Fed has maintained very low interest rates given the economic impacts of the Great Recession. After just a few years of it slowly rising back up, rates were virtually cut back to zero after the Covid-19 pandemic. In the past year though, due to heavy inflation, the Federal Reserve has been hiking up rates which has now caused the Treasury bonds yields to increase.

At the same time, the stock market has been in a major bull run over the same period. Over the past ten years, the S&P 500 has returned 12.4% annually, more than the benchmark's historical average. Much of this is due to the recovery from the 2008 financial crisis, the booming of the tech sector, and the aforementioned lax monetary policy from the federal reserve.

Given the stock markets high performance, and treasury bonds low yield, the past decade has seen many moving away from bond markets and investing more into stocks; however, the recent contractionary monetary policy from the federal reserve could change that going forward, and investors should consider the risks and benefits of investing in stocks and bonds.




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