Beyond the Bell: Fixed Income – Better Days Ahead

“No matter how dark the night, somehow the sun rises once again and all shadows flee.” — Vern McLellan

Bond investors have weathered a long proverbial storm of poor returns. Over the past ten years, bonds, as represented by the Bloomberg U.S. Aggregate Bond Index (the ​“Agg”), have averaged a 1.3% annual total return. Over the past five years alone, the Agg has declined nearly 3%.

Given that fixed income has traditionally been a relatively stable contributor to portfolio performance, this extended period of disappointing returns has prompted several questions: What happened? Why own bonds? And what do we expect going forward?

What happened?

Over the past several years, we have transitioned from a historically low interest-rate environment to a more normalized one. For context, the U.S. 10-year Treasury yield was approximately 1.7% ten years ago and fell as low as 0.5% in 2020. Today, it is near 5%.

As interest rates rose, the prices of existing bonds declined, weighing on bond portfolio total returns.

Why own bonds?

There are several reasons. First, fixed income can serve as an effective portfolio diversifier, helping to mitigate some of the volatility associated with equities. Second, bonds can provide a relatively steady stream of income that equities may not consistently provide.

Ultimately, we believe a portfolio’s fixed income allocation should be aligned with the investor’s risk tolerance, liquidity needs, time horizon, and overall financial objectives.

What do we expect going forward?

Perhaps the most important point is that bond investors are starting from a much higher yield environment today than they were five, ten, or fifteen years ago.

As the chart below illustrates, 10-year forward returns for bond portfolios, as represented by the Agg, have historically been strongly correlated with starting yields. With yields near 5%, the outlook for future bond returns is meaningfully more attractive than it was when yields were near historic lows.

Sources: Bloomberg and SEIA. Monthly data: September 30, 1976 – August 31, 2026.

After a challenging decade, the setup for bonds looks considerably different than it did just a few years ago. Higher starting yields have restored a more meaningful income component to fixed income and, in our view, make the asset class an important consideration for well-diversified portfolios.

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Signature Estate & Investment Advisors, LLC (SEIA) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Securities offered through Signature Estate Securities, LLC, member FINRA/SIPC. Investment advisory services offered through SEIA, 2121 Avenue of the Stars, Suite 1600, Los Angeles, CA 90067, (310) 712‑2323. This material is provided for informational purposes only and does not constitute individualized investment advice or a recommendation of any specific security, strategy, or course of action. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance.