High inflation alone isn’t bad for US Treasuries — instead, it’s a rapid increase in the pace of price growth that does the most damage, according to a study by Man Group.
When inflation has been between 2%-4%, as it is currently, 10-year US Treasuries have historically delivered an average annualized nominal return of 6.9% over these periods, a note published Tuesday showed. Adjusted for inflation, the average annualized return was 4%.
But bond performance suffers badly if inflation starts to accelerate rapidly above 4%. In a scenario where it quickens by more than 50 basis points over three months, 10-year Treasuries delivered a real annualized loss of 11.7%, the study showed.
“The current overarching narrative is that inflation is going to stay ‘higher for longer’ and that this is bad news for bond holders. We’re not so sure,” authors including Peter Weidner, head of total return strategies, systematic, wrote.
Read more: Ten Reasons Why Investors Are Driving Up Bond Yields: Explainer
A torrid period for Treasuries has pushed yields to some of their highest levels in decades as an AI spending boom points to an era of robust economic growth and persistent price pressures. That’s left many investors reluctant to step in and buy bonds, though Man Group’s analysis suggests the securities still deserve a place in a long-term portfolio.
“We don’t believe you should write off bonds just yet,” the authors wrote. “They have historically done well when equities fell, and far from being doomed in a ‘higher for longer’ world, they can still deliver positive real returns.”