Income Drives Core Bond Returns

October 02, 2013

This week’s chart shows the since inception growth of a dollar in core bonds, represented by the BarCap Agg index, from January 1976 through August 2013. The total return components — price return and income return — are broken out separately to highlight just how significant the coupon payment is for the performance of this index over time. Since inception, approximately 85% of total return is attributable to the income component.

Given our current low rate environment and the future headwinds of rising interest rates, performance going forward is anticipated to be lower than what was achieved during the last 30 years, which was largely a falling interest rate environment. However, it is important to note that the income component will always yield a positive return, unlike price appreciation which will vary depending on interest rates. Principal repayment and the income from coupons represent a steady and consistent source of return for investors. This feature continues to make core bonds a sensible asset class for most institutional investors who want to maintain liquidity and principal protection in their portfolios.