© 2013 Morningstar. All Rights Reserved. Investing in a Rising- Interest-Rate Environment Markets Research Team Morningstar
Nov 01, 2014
© 2013 Morningstar. All Rights Reserved.
Investing in a Rising-Interest-Rate Environment
Markets Research TeamMorningstar
History of Interest RatesJanuary 1926–August 2013
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
0
12
16
20%
30-day Treasury billsIntermediate-termgovernment bonds
Long-termgovernment bonds
8
4
Average: 5.2%
Current: 3.4%
4.6%
1.1%
0.0%
3.6%
Long-Term Government Bonds’ Downturns and RecoveriesJanuary 1926–August 2013
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
1
10
$100
1996 20061986197619661956194619361926
Growth of $1
0
6
8
10
12
14
16% Yield
4
2
• Long-term government-bond yield• Recoveries• Downturns• Expansions
Downturns of 10% and more
Long-Term Government Bonds’ Downturns and RecoveriesJanuary 1926–August 2013
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
–18.8%
–10.4%
–21.0%
–10.3%
–13.4%
–12.1%
–10.4%
–11.2%
–14.9%
–11.4%
% Loss
–13.2%
40 months
21 months
27 months
13 months
7 months
9 months
15 months
2 months
12 months
5 months
Downturn
13 months
10 months
4 months
10 months
4 months
4 months
7 months
7 months
14 months
8 months
7 months
TBD
Recovery
TBD
Jan 1960–Dec 1960
Jun 1970–Mar 1971
Sep 1974–Dec 1974
Oct 1981–Jul 1982
Jun 1984–Sep 1984
Oct 1987–Jan 1988
Nov 1994–May 1995
Jan 2000–Jul 2000
Aug 2003–Sep 2004
Jan 2010–Aug 2010
Aug 2012–Aug 2013
Jun 1958–Dec 1959
Feb 1967–May 1970
Dec 1972–Aug 1974
Jul 1979–Sep 1981
May 1983–May 1984
Mar 1987–Sep 1987
Feb 1994–Oct 1994
Oct 1998–Dec 1999
Jun 2003–Jul 2003
Jan 2009–Dec 2009
Sep 2010–Jan 2011 Feb 2011–Aug 2011
–10.9%19 months 12 months
Average 7.9 months–13.2%15.3 months
Intermediate-Term Government Bonds’ Downturns and RecoveriesJanuary 1926–August 2013
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
1
10
$100
1996 20061986197619661956194619361926
Growth of $1
0
6
8
10
12
16
18% Yield
4
2
14
• Intermediate-term government-bond yield• Recoveries• Downturns• Expansions
Downturns of 5% and more
Intermediate-Term Government Bonds’ Downturns and RecoveriesJanuary 1926–August 2013
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
–5.7%
–8.9%
–8.5%
% Loss
–6.9%
15 months
8 months
15 months
Downturn
10 months
7 months
2 months
3 months
6 months
Recovery
Dec 1994–May 1995
Feb 1932–Aug 1932
Sep 1959–Mar 1960
Mar 1980–Apr 1980
Feb 1994–Nov 1994
Jun 1931–Jan 1932
Jun 1958–Aug 1959
Jul 1979–Feb 1980
Jun 1980–Aug 1981 Sep 1981–Nov 1981
–5.3%8 months 7 months
Average 5 months–7.1%11.2 months
Investors Have Most of Their Money in Intermediate BondsAs of August 2013
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
23%
13%
64%
• Short-term bonds• Intermediate-term bonds• Long-term bonds
Bond Prices Decline for Longer Periods in Low-Interest-Rate Environments Downturns of Long-Term Government Bonds, January 1926–August 2013
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
Below 3%
Starting bond yields in the beginning of each of the past 25 biggest bond-market declines
3%–5% 5%–7% Over 7%
25 Average decline (months)
20
15
10
5
0
Fund Flows and Asset-Class PerformanceJanuary 1994–August 2013
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
Asset-Class Performance
Annual Net Asset Fund Flows
–200
–100
200
$300 billion
–40
–20
0
20
40% Return
100
0
94 95 96 97 08 09 Jan–Aug 13
10 1104 05 06 0798 99 00 01 02 03
• U.S. stocks • International stocks • Bonds
12
20
10
0
–20
$50 bil
40
30
Annual Net Flows of Noncore-Bond FundsJanuary 2007–August 2013
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
• Bank loan
• Emerging markets bond
• High-yield corporate bond
• Nontraditional bond
2007 2008 2010 2011 2012 2013 YTD2009
–10
20
10
0
–20
30%
Average Performance of Bonds Based on Monthly Interest-Rate ChangesJanuary 1926–August 2013
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
Rising interest rates Falling interest rates Full period returnNeutral interest rates
–10
• 30-day Treasury bills
• Intermediate-term government bonds
• Long-term government bonds
• Long-term corporate bonds
• High-yield corporate bonds
Bond Performance in Times of Rising and Falling Interest RatesJanuary 1960–August 2013
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
0
–15
–15
5-year government-bond yield
Long-term government bonds
High-yield corporate bonds
20%
15
30
45%
–15
Long-term corporate bonds
10
5
15
0
30
45%
15
0
30
45%
15
0
74.6%
87.9%
60.7%
Shaded areas represent rising interest rates
Corporate Credit Spread and Treasury YieldJanuary 1973–August 2013
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
2
4
6
8
10
14
16
–1
0
1
2
3
4
5
6
7% Credit spread
20082003199819931988198319781973
• Intermediate-term corporate A credit spread
• Barclays US Government yield index
18% Yield
12
0
2013
QE1
QE3
QE2
15
10
0
–5
20%
Average Performance of Equities Based on Monthly Interest-Rate ChangesJuly 1927–December 2012
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
Rising interest rates Falling interest rates Full period returnNeutral interest rates
5
Dividend size
• No dividend
• Lowest 30%
• Medium 40%
• Highest 30%
0
2
4
6
16
18%
1871 1881 1891 1961 1971 1981 1991 2001 2011
Large Stock Dividend Yield Versus 10-Year Treasury YieldJanuary 1871–August 2013
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
• 10-year Treasury yield
• Large stock dividend yield
8
10
12
14
1901 1911 1921 1931 1941 1951
Inflation, Not Rising Rates, Biggest Bond Threat in the Long TermIntermediate-Term Government Bonds, January 1926–August 2013
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
1
10
$100
2001 20111956195119461941193619311926
• Nominal performance
197119661961 198619811976 1991 1996 2006
• Inflation-adjusted performance
1970 1972 1974 19781976 1980
100
120%
0
80
60
40
20
–20
Bonds Can Deliver Negative Returns onInflation-Adjusted Basis, 1970–1980
Nominal
Inflation-adjusted
5.3%
2.3%
Annualized return
Rolling Period Risk and ReturnJanuary 1926–August 2013
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved.
1-year periods (1,041) 5-year periods (993) 10-year periods (933) 20-year periods (813)
–20
–10
0
10
20
30
40
60%
74.0% 77.8% 78.5% 81.3% 86.9% 94.3% 94.6% 96.2% 94.3% 100.0% 99.9% 100.0% 100.0% 100.0% 100.0% 100.0%
50
162.9% 108.7%
–67.6% –48.0%• Large stocks • Portfolio • Long-term government bonds • Long-term corporate bonds
Understanding the Graph
Best 5%
Other 90%
Worst 5%Most Recent Return
Median Return
Positivereturns