What's the Average Return on an All-Bond Portfolio? - SmartReads by SmartAsset (2024)

Like all markets, bonds fluctuate. Your returns will be based on what you hold, when you buy it, tax treatment and other factors.While many choose to diversify their portfolios across stocks, bonds and other assets, an all-bond portfolio may allow for more predictability and income generation. You can also diversify an all-bond portfolio with different products.

Despite the various ways to set up a portfolio, you can estimate a return on an all-bond portfolio by looking at current yields. For example, a triple-A rated corporate bond you can expect a yield of about 5.6%.Or, if you purchase a ten-year Treasury bond, you can expect a yield of about 4.45%.

That’s just the tip of the iceberg, though.

A financial advisor can help you determine the best way to set up an income-generating portfolio for your goals.

Why Invest in Bonds?

Bonds provide two main benefits for your portfolio: security and income.

A bond-based portfolio is generally secure. With a bond you aren’t an investor, you’re a lender – so you only lose money if the borrower defaults. There is still some risk here, but with creditworthy borrowers it’s low. Historically, for example, well-rated corporate bonds default between 0% and 0.38% of the time.

These portfolios are generally also income-generating, meaning they issue regular payments while you hold them. Unlike regular stocks, you don’t have to sell off bonds in order to convert them to cash. You receive cash payments periodically, typically either every every six months, creating a stream of income that can potentially last for decades depending on the details of your specific bonds.

The downside to all of this is that bonds tend to provide a low return compared to the rest of the market. Riskier assets like stocks and real estate may often outpace the returns of a bond portfolio.

Three Types of Bonds

Setting aside foreign investment, there are three types of bonds:

Creditworthiness is most important with corporate bonds. These can have a wide range of interest rates determined by an individual company’s credit, assets and reputation, and have the most risk associated with them since companies could theoretically default.

Two Types of Bond Returns

There are two main types of return for bonds: Yield and Capital Gains.

Yield is based on the interest payments you receive for holding the bond. It is the ratio of interest you receive compared with what you paid for the bond. For example, if you receive payments of $50 per year on a bond for which you paid $1,000 for the yield would be 5%.

When you purchase a bond directly from the issuer, the yield and the interest rate are the same. When you purchase a bond from another investor, the yield can differ from the interest if you did not pay face value for the note.

Capital gains may apply if you sell the bond to another investor at a premium. In our example above, say, if you were to sell the bond to someone else for $1,100, your market return would be 10% and may be subject to capital gains tax.

Note that the tax treatment on the bond returns varies depending on the circ*mstances. Talk to a financial advisor today to ensure you have the right tax mitigation strategy.

Average Return On Bonds

Measuring the return on a bond is not like measuring the return of a market asset. The yield on your asset will not fluctuate over time. It is fixed at the time of purchase. If you buy a bond at 6%, it will remain at 6% regardless of market activity. This reduces the value of long-term averages for investment decisions.

At the same time, average return for bonds is an extremely broad subject. Bonds will have different yields and market returns based on the duration of the note, the issuer, the rate structure and more. A 10-year Treasury bond, for example, will have an entirely different profile from a 30-year BBB corporate bond.

However there are a few broad averages we can pull.

If you build a portfolio entirely out of bonds, investing in different types over time, historically this would generate a 5.33% average return. This represents the return on a managed portfolio that combines interest and market returns.

The bond market may be accessed in index form, with individual investments reflecting the value of a variety of assets. Among bond indexes include:

At time of writing, you can buy corporate bonds for an average yield of 5.61%. This would be your interest-based return if you built a 100% bond portfolio overnight.

In the long run, if you were to only invest in AAA corporate bonds over time, you can expect a modern yield between 4% and 5%. Historic rates have been higher, sometimes up to 15%, leading to a 30-year average of 6.1%.However this is likely misleading, as corporate bonds have only averaged a yield above 6.1% once in the past 20 years.

Discuss strategies to obtain the best return rates with a financial advisor.

Perhaps the most representative asset offered by the Treasury is a 10-year bond. If you purchase a 10-year Treasury at time of writing, you could expect a yield of about 4.45%.Based on yields over the past 20 years, you can expect average interest payments of between 3% and 4%.

The Bloomberg Municipal Bond Index is generally considered to be the municipal bond benchmark. Over the past 10 years it has averaged a 2.12% average annual return, although that figure has fluctuated from a 9.6% high to a -2.6% loss.This is consistent with the S&P 500 Municipal Bond Index, which has a 2.6% 10 year return. Remember, a financial advisor guide you through bond portfolios.

The Bottom Line

The bond market is a wide field, with many different categories of assets. In general, you can expect a return of between 4% and 5% if you invest in this market, but it will range based on what you purchase and how long you hold those assets.

Bond Market Tips

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