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History Lessons: Bonds outgun equities over 30 years

  • 31 October 2011

Long-term government bonds have gained 11.5 percent a year on average over the past three decades, beating the 10.8 percent increase in the S&P 500 according to a study by Bianco Research.

President Jim Bianco told Bloomberg "The generation-long outperformance of bonds over stocks has been the biggest investment theme that everyone has just gotten plain wrong. It's such an ingrained idea in everyone's head that such low yields should be shunned in favour of stocks, that no one wants to disrupt the idea, never mind the fact that it has been off."

The big factor has been this year's performance although it has caught out several star names including US specialist bond manager Pimco's Bill Gross. Many managers simply underestimated how much debt America would pay down and how much they would invest in bond markets.

U.S. government debt is up 7.23 percent this year, according to Bank of America Merrill Lynch's U.S Master Treasury index.

Long-Term UK trends

However those considering embracing government bonds may also want to consider the UK based study the Barclays Equity Gilt study. Its view of the long term trend – that demographic changes could put a lot of downward pressure on government bonds, was analysed extensively by FTAlphaville in February this year.

Although slightly out of date, it is worth bearing in mind that the study was looking far into the future:

"Effectively, the models are suggesting that the shrinkage in the high savings population cohorts and an expansion in the retired population will alter supply demand dynamics in the debt capital markets in a profoundly negative manner."

Here This is Money discusses investing in bonds and gilts (UK government debt) and discusses the difference between the two.

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