The Agg: A Better Long-Run Performer

In fact, looking back over the Agg’s lengthy history, its recent underperformance looks more and more like an outlier. Since 1976, the Index has actually delivered mostly positive returns during its lifetime—to be specific: 495 of 571 instances (86.7%) of positive performance (FIGURE 2). While periods of elevated interest rates generally create difficult environments for bonds, history suggests the Agg’s recent bout of underperformance isn’t likely to last. In fact, the Agg has historically rebounded after past difficult periods. 

There have been other instances in history where the rolling drawdowns have extended over multiple periods—typically related to Fed hiking cycles, periods of high inflation, or both. But the periods following these drawdowns have typically been beneficial to bondholders, with the Agg eventually delivering strong returns (FIGURE 3).

A Turning Point on the Horizon?

As for the future, we believe there are several near-term catalysts that could potentially propel the Agg out of the doldrums. 

1. The current level of interest rates could be a good starting point for better bond returns. Rising yields are bad for bonds, but high starting yields have historically been positive for bonds. During the course of the most recent tightening cycle, the 10-year US Treasury rate moved up to 5.0% and has averaged 4.03% since the last Fed hike in July 2023. This average rate of 4.03% for the 10-year Treasury is very close to the 4.44% average Treasury rate from 2000-2010, a period in which the Agg delivered an average annual return of 6.33% (FIGURE 4).

2. The Fed recently signaled that its tightening cycle is likely to end. Fed Chair Jerome Powell recently stated that a rate cut “could be on the table” in September when the Federal Open Market Committee meets to re-evaluate inflation and employment data. While Powell’s assertion doesn’t necessarily guarantee that rate cuts are imminent, the periods that have followed the Fed’s initial cut have historically been beneficial for bonds (FIGURE 5).

The periods that have followed the Fed’s initial cut have historically been beneficial for bonds.

3. Higher coupon yields may make bonds seem like an opportunity just as the Fed is approaching rate cuts. The runup in rates is providing healthy coupon yields as well as opportunities for investors to buy bonds at a discount. That could set investors up for enhanced income and potential capital appreciation. All in all, the current level of interest rates, combined with an accommodative Fed, could be creating an environment for bond funds to potentially cast off their recent disappointment with the Agg as we return to a more normal—and, hopefully, dull—environment.

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Important Risks: Investing involves risk, including the possible loss of principal. • Fixed-income security risks include credit, liquidity, call, duration, event and interest-rate risk. As interest rates rise, bond prices generally fall. • U.S. Treasury securities are backed by the full faith and credit of the US government as to the timely payment of principal and interest.

The views expressed here are those of the author and should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams, and different fund sub-advisers, may hold different views and may make different decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the expresss written consent of Hartford Funds.