# Historical Performance of US Markets

## Historical Picture of Returns to Bonds


### Learning Outcomes

By the end of this section, you will be able to:
1. Detail the behavior of sovereign (government) bonds over various historical periods.
2. Detail the behavior of corporate bonds over various historical periods.
3. Extract sovereign and corporate bond investment results from plots and charts.

### Federal Government Bond Behavior, Discussion, Charts, and Graphs

United States Treasury (sovereign) bonds are among the safest investments available. In fact, T-bonds often serve as the proxy for a risk-free investment in financial modeling. However, even though T-bonds may be essentially default-risk free, they do change value as interest rates change. Look at , showing annual T-bond returns from 1980 to 1999. None of these bonds defaulted, yet investors realized very different returns on their investments from year to year. The total returns reflect interest payments plus the change in price because of changes in interest rates.
The late 1970s experienced high rates of inflation and interest rates. As those rates began to fall in late 1981, bond prices rose. Investors holding T-bond portfolios realized very large returns on their risk-free investments in 1982. That year provided the highest annual return in the 20-year period, with an annual return of 32.81%. The lowest annual return was in 1999, as the Federal Reserve began to raise rates to temper an overheating stock market caused by dot-com speculation gaining momentum. When the Fed raised interest rates, the prices on existing bonds fell, and investors realized a -8.25% return on their bond portfolios. Thus, the range in returns on these “low risk” investment securities was over 41% from the highest to the lowest annual return in this particular two-decade span. Overall, the average annual return on T-bonds from 1980 to 1999 was a robust 10.21%, boosted in part by the above average annual inflation rate of 4.28%.
Inflation slowed from 2000 to 2020, and the average annual rate of return on T-bonds fell accordingly (see ). With reduced variability of interest rates in the new century and interest rates in general being lower, the returns on bond portfolios were also lower on average. T-bonds in the first two decades of the twenty-first century averaged an annual return of 5.77%, very close to the long-run average return in the previous century. The range of returns was also smaller than the previous two decades, with the highest annual return topping out at 20.10% in 2008 and the lower end dipping down to -11.12% in 2009 as the Fed made a significant effort to reduce interest rates in an attempt to stimulate the economy following the Great Recession.

### Corporate Bond Behavior, Discussion, Charts, and Graphs

The performance of Baa bonds is very similar to T-Bonds over the four decades spanning 1980 to 2020 (see ). These bonds are not default-risk free and require a risk premium for investors. The average annual return of 12.07% from 1980 to 1999 topped T-bonds by 1.86%. The margin was greater in the period from 2000 to 2020 (see ), with Baa bonds (mid-tier corporate bonds) realizing an average annual premium of 2.30% over the default-risk free T-bonds.
These premiums translate to a substantial increase in investment performance. For example, had an investor placed $100 into a T-bond portfolio in 1980, the value of the investment would have been $1,931 by year-end 2020. This would have easily outpaced the rate of inflation but significantly lagged the ending value of $4,506 on a similar Baa bond portfolio investment (see ).

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Historical bond yields are published going back hundreds of years but are only reliably available for the last 100 years or so. In large part, the returns realized on portfolios of bonds have been smaller and less variable than the returns realized for equities.

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