Review of "100 Years of Corporate Bond Returns Revisited"

by: Ira Artman

Deutsche Bank’s 100 Years of Corporate Bond Returns Revisited, by Jim Reid, Nick Burns, and Adekunle Ademakinwa, is much more than "Bonds - Just Bonds."

The 53 page document (the "Report") - filled with charts and tables - provides a comprehensive review of both nominal and real returns for US Corporate Bonds, Treasuries, Equities, Property, and Oil.

My much shorter review will focus on what I believe are the highlights of this "Fundamental Credit Special" that Deutsche Bank published on 5 November 2008, but you should obtain and read the complete Report. What follows, of course, are my views, and do not necessarily reflect those of either Deutsche Bank or UBS (I use UBS’s website towards the end of my post.)


A mean-reverting process is one in which the best prediction of next period’s return is the long run average return plus a correction factor that depends on the deviation of the current return from the long-run average.

If recent returns are above long run average returns, then the correction factor "forces" future returns down. If recent returns are below long run average returns, then the correction factor "forces" future returns up.

If a process is NOT mean reverting, then it may exhibit some sort of trend.


While hoarding cash under the mattress may look smart today (to both individuals and TARP participants), this is usually not the correct long-term investment strategy.

Below are the 50-year and 25-year real (inflation adjusted) returns for a broad array of asset classes. Note: Longer-term returns are NOT available for all of the listed asset classes.

My table emphasizes several things:

  • Current year returns have been almost uniformly rotten;
  • Returns over the last 25 years for most asset classes have been exceptional, and well above longer term (such as 50 year) averages;
  • Long term US Treasuries have been the best performing asset class over the last 25 years; and
  • Investing in residential property has not typically been a reasonable alternative to asset classes (such as stocks or bonds) that provide dividends or coupons.


There is no parallel period for investing that approaches the stunning 25 year era that ended in 2005, and which understandably colors our expectations about what we "should" earn on our investments.

In searching for an explanation, the Report suggests that it may reflect demographic influences, which can be simply measured by the relative size of the "asset accumulating" population segment (determined perhaps by proportion of the population between 35 years old and 54 years old).

Ominously, over the last 20 years, Japanese equity returns have been virtually non-existent. Since the worldwide post WWII "Baby Boom" began in Japan in the 1940’s and spread gradually westward, the Japanese demographic hump precedes that of the US by about 15 years.

The Report suggests that demographically-related lousy Japanese equity returns may be echoed, with a lag, by those in the US. If this poor period began here 10 years ago, we may only be halfway through our own rotten times.

Bond returns in the US may be even more closely correlated to demographic bulges than equity returns. The recent 25-year out-performance of long term Treasuries, along with diminished demographic factors, may signal that future real Treasury returns could easily be negative.

The Report suggests that the solution to poor US investment returns and other demographically related problems may lie in either a legislated increase in retirement ages, and/or increased openness to foreign immigration and investment. If these alternatives are not explored, the US future may resemble the Japanese past.


Given possible meager prospects for both real equity and US Treasury returns, what’s left that looks promising?

On a risk-adjusted basis, the Report suggests credit, represented either by investment grade (included in my table, above) or high-yield/lower-rated (excluded from my table, due to lack of 50 year history) corporate bonds, may provide the best returns, since this "asset class … is trading furthest away from its mean and spreads are at levels never before seen in either investment grade or high yield credit."

The Report does not consider mortgages investments, presumably because mortgage securities have been a relatively recent invention. But since prepayment and credit are frequently two sides of the same coin, perhaps this is an opportune time to consider returns derived from assuming prepayment, but no credit, risk.

Where can one get this exposure? Why, in GNMA’s of course.

Below, for what it’s worth, are two relatively long term regression charts, more than thirteen years. Normally, this would be considered a long-term regression, except that the Report is focusing on generations, not years. The first chart shows Actual and Model GN30 spreads to 5 year UST. The second chart simply shows the residuals.

As the charts indicate, while Treasuries may not be compelling, IF you are unwilling (for whatever reason) to invest in the credit sector discussed by the Report, you might want to consider GNMA investments - their yields are very wide to treasuries, although nothing like the credit products discussed in the Report.

Source: UBS Mortgage Strategy Website,


Are there limits to the insight that one can obtain from a mean-reverting analysis? Of course, and pages 29 and 30 of the Report discuss these in more detail and deserve your attention as well.

Given the extraordinary times, from a return perspective, that now plague us, believe there is much to be learned by taking a careful and critical look at where we’ve been. Deutsche Bank’s One Hundred Years of Corporate Bond Returns – Revisited is a good place to start.

Positions: None.