The long-running market truism that stocks always outperform bonds has been upended for the first time since the Civil War era, at least by one measure. For the 30 years ended Sept. 30, Treasuries maturing in 20 years or more averaged annual gains of 11.5 percent, according to the Ibbotson Long-Term Government Bond Index, beating the 10.8 percent annualized in Standard & Poor’s 500-stock index. That means $1,000 invested in long-term Treasuries in 1981 would be worth $26,197 today, while the same amount put into stocks would total $21,745. “The generation-long outperformance of bonds over stocks has been the biggest investment theme that everyone has just gotten plain wrong,” says Jim Bianco, president of Bianco Research in Chicago.
This year, especially, investors have sought the relative safety of Treasuries and other bonds as U.S. economic growth remains weak and Europe’s fiscal crisis threatens to push the global economy back into recession. Mutual funds that focus on bonds have attracted $789.4 billion since 2008, compared with a $341 billion drop in equity funds, according to data compiled by Bloomberg and the Washington-based Investment Company Institute.
Over the past three decades the gains on bonds have come from a combination of price increases and interest income. In September 1981, long-term Treasury bonds were yielding about 14 percent. Thirty years later the yield had dipped below 3 percent. Since bond prices rise as rates fall, holders of long-term Treasuries have seen big gains in the value of their bonds along with their interest payments.
So far, 2011 has been a banner year for many types of bonds. U.S. government debt was up 7.23 percent through Oct. 31, according to Bank of America Merrill Lynch’s (BAC) U.S. Master Treasury index. Municipal securities have returned 8.17 percent, corporate notes have gained 6.24 percent, and mortgage bonds have risen 5.11 percent. All have bested the S&P 500, down 1.5 percent, and the S&P GSCI index of 24 commodities, up 0.25 percent.
The last time bonds notched a similar win over stocks was during the 30 years from 1831 to 1861, according to Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School. Siegel, author of Stocks for the Long Run, has made a specialty of studying historical investment returns. He does not expect bonds to continue their dominance, in part because interest rates are so low that they can’t decline much further. “The rally in bonds is a once-in-a-millennium event, but it’s absolutely mathematically impossible for bonds to get any kind of returns like this going forward,” he says. “Stock returns can repeat themselves and are likely to outperform. If you missed the rally in bonds, well, then that’s it.”