The two bond indices also had varying performance profiles in increasing and declining interest rate environments. Between 1995 and 2015, the months when Treasuries delivered their worst performance were the months when corporate bonds outperformed Treasuries by the largest spread (see table below). We divided the 249 months in this period into modified quartiles based on whether the S&P/BGCantor 7-10 Year US Treasury Bond Index was positive or negative and then further divided those months equally into the biggest and moderate changes in each direction. In the worst quartile for Treasuries, an average monthly decline of 2.04%, the S&P 500 Bond Index’s average decline was only 0.79%, an outperformance of 1.24%. In those same months, an archetypal 60/40 allocation with corporate bonds yielded outperformance of 0.49% versus one with Treasuries.
Heightened sensitivity to anticipated interest rate increases is understandable. However, the impact of interest rate changes varies with different types of bonds. Historically, when interest rates rose, their effect on corporate bonds have been muted compared to that of Treasuries. Similarly, a balanced allocation incorporating corporate bonds has offered more protection relative to Treasuries during these times.