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Bonds’ Outperformance: Short-Term and Long-Term

16 August 2012 in Trading Ideas

Recent behavior has made a pretty clear open-and-shut case that investors have been opting for the bond market over stocks for some time now.

As the Associated Press recently noted, US stock-based mutual funds had their fifth-straight month of net outflows in July, with nearly $13 billion in lost assets.

That figure, by consulting firm Strategic Insight, coincides with net deposits in bond funds that are already 50% above where they were for all of last year.

Based on this data, it’s reasonable to assume that the current mindset of investors speaks to their belief that bonds are an attractive alternative for their investment portfolios right now compared with stocks.

Blogger Barry Ritholtz recently suggested, the 1.8% yield on the 10-year Treasury note doesn’t necessarily make a good bet that bonds will beat stocks over any point in the future, but the general outperformance of bonds over stocks has been shown to be consistent over recent shorter- and longer-term timeframes.

Last October, several media outlets reported the finding that since 1981 long-term government bonds have gained an average of 11.5% a year, compared with the S&P 500, which gained 10.8% over the same period, with much more risk and volatility.

As it turns out, this outperformance has also been a more recent phenomenon. If you start at Jan. 1, 2010, the total return of 30-Year Treasuries has beaten the performance of both gold and the S&P 500 Index, according to Bianco Research.

Stocks, of course, continue to have their proponents. Jeremy Siegel, author of Stocks For The Long Run, continues to maintain his so-called Siegel Constant, which states that stocks have delivered returns, including reinvested dividends, of 6.6% for more than 200 years.

However, recent criticism of Siegel by Ritholtz and others suggests the 6.6% figure is cherry-picked by Siegel to ignore failed companies and by using aggressive dividend assumptions.

Tags: bonds, stocks