Much of what we write about—and what most financial news covers—revolves around stocks and the stock market. There’s good reason for this: stocks make up more than half of our clients’ investment assets, market news can cause significant swings in prices and future outlooks, and frankly, stocks are just more entertaining to follow. But bonds play an equally important—if not even more crucial—role in portfolios. So, how are things looking on that side of the equation?
As I tend to do, I like to start with a little bit of history. Since 1928, US bonds have, on average, earned you inflation plus a little extra on top. Annually, the 3-month Treasury Bill has returned about 0.28% above inflation, the 10-year Treasury Bond about 1.42% above inflation, and medium-grade corporate bonds about 3.48% above inflation.
Since 2010, with interest rates at historical lows for much of this period, the story has been quite different. Both the 3-month and 10-year Treasuries have lagged inflation, earning 1.32% and 0.57% less per year, respectively. Corporate bonds have done better, still outpacing inflation by 2.34% annually, but even that is below their long-term average. (All return data from NYU Stern)
So, what does the outlook look like from here? While many factors shape future bond returns—interest rate movements, changes in credit quality, defaults, and more—investors can project bond returns far more accurately than stock returns. Historically, 10-year Treasury bonds have tended to deliver annual returns within about +/- 2% of their starting yield over the following decade. For 10-year corporates, that range is about +/- 2.5%.
Based on this historical data, with the 10-year Treasury yield at roughly 4.4%, a bond investor can reasonably expect annual returns somewhere between 2.4% and 6.4% over the next decade. For Baa-rated corporate bonds, the current yield is about 6.15%, so expected returns would fall between 3.65% and 8.65%. For context, the 10-year expected inflation rate currently stands at about 2.3%–2.4% (FRED – 10-Year Breakeven Inflation Rate).
Based on these figures, the outlook for bonds looks more in line with historical averages—bond returns outpacing inflation by about 1–2% for U.S. Treasuries and a little bit more for corporate bonds. While your bond investments may never be as exciting as the stock portion of your portfolio, they serve the vital role of providing stability and income. Having this part of your portfolio fulfill both of those missions—while also protecting your purchasing power for years to come—is exactly what you want.
Chart of the Week:
I couldn’t resist myself, back to the exciting asset classes… It’s quite remarkable to see how well markets across the board have performed since April’s tariff turmoil. At the lows on April 8th, the S&P 500 was down 15% year-to-date from its January 1st levels — only to be outdone by Bitcoin, which was down a little over 18%. International markets held up better, with developed markets down just 3.5% and emerging markets down about 8.5%. Gold was the lone bright spot, with a positive return just under 14%.
Fast forward a little over three months, and all of these markets now sit comfortably positive for the year and are essentially back at their all-time highs. This includes emerging markets, represented by the iShares Core MSCI Emerging Markets ETF, which hasn’t reached these levels since February 2021.
Financial Planning Corner:
401k Catch-Up Provisions – Are You Taking Full Advantage of Your Saving Opportunities?
Now that we are in the latter half of the year, now is a good time to check in with your 401k savings. For 2025, the IRS allows employees to contribute up to $23,500 to their 401k plan. If you’re age 50 or older, you can contribute an additional $7,500 in catch-up contributions, bringing your total to $31,000 for the year.
The IRS also introduced a new “super” catch-up provision that have taken effect for 2025. For individual savers aged 60-63, their catch-up contribution cap is raised to $11,250. The owner of the account must be turning 60, 61, 62, or 63 in 2025 to be eligible for this provision (born between 1962 and 1965). This means, if you are in this age cohort, you can personally contribute up to $34,750 into your retirement plan.
For small business owners, you are eligible to contribute as both the employee and employer. For the employee portion, you are eligible for all the catch-up provisions mentioned above. For the employer portion, you are eligible for 25% of your compensation until your combined employee and employer contributions hit the following caps:
- $70,000 if you are under 50 years of age
- $77,500 if you are age 50–59 or 64+
- $81,250 if between the ages of 60-63
For a full list of retirement plan options for business owners, check out our article: RSWA Blog – Retirement Savings Options for Small Business Owners
401k plans offer a great, tax-advantaged way to save for retirement. While not everyone can or should max out their plan, contributing as much as you comfortably can goes a long way toward ensuring a more secure retirement.
Quick Hits:
- Beware of the unsubscribe button? Why the unsubscribe button may not be your best defense against unwanted emails: WSJ
- Looking for a fun night out this summer? Check out the Prescott Park Arts Festival for live music, a musical, or a movie: Prescott Park Arts Festival
- The Tour de France is a little past halfway on their 21-day trek through France. Here are a few Tour specific hits:
- Here are some of the most beautiful places the Peloton is racing through: Qantas – Travel Insider
- Is it a bike race or an eating competition? Inside the amount of calories riders consume on a daily basis: Cycling Weekly, The Athletic
- And how cherry juice plays an important role for these athletes: Velo
Independence – Retirement planning is at the core of what we do as a firm. Millions of working people save and look forward to this time for decades. And while sitting on a beach on a sunny Wednesday afternoon certainly sounds better than answering emails (unless they’re from my wonderful clients, of course!), I’m not sure that’s the exact dream we’re all chasing. Personally, I believe we’re all striving for a form of independence. Financial independence, for sure — reaching that point where we no longer rely on a paycheck. But just like everything else, money is only one piece of a bigger puzzle. The freedom that comes with moral, cultural, and intellectual independence plays just as big a role in a fulfilling retirement — or a fulfilling life in general.
While retirement can be the perfect time to shape your ideal independent and meaningful life, there’s no rule saying you have to wait until then. Striving for your own version of independence — and combining it with a sense of purpose — can and should be a focus long before you retire. Collaborative Fund – Pure Independence
Quote: “A simple formula for a pretty nice life is independence plus purpose.” – Morgan Housel
Thank you for reading RSWA Financial Advisor Insights! We welcome feedback, and please forward this to a friend! Be well, take care, and stay safe!
