Email FacebookTwitterMenu burgerClose thin

What’s the Average Return on an All-Bond Portfolio?

SmartAsset maintains strict editorial integrity. It doesn’t provide legal, tax, accounting or financial advice and isn’t a financial planner, broker, lawyer or tax adviser. Consult with your own advisers for guidance. Opinions, analyses, reviews or recommendations expressed in this post are only the author’s and for informational purposes. This post may contain links from advertisers, and we may receive compensation for marketing their products or services or if users purchase products or services. | Marketing Disclosure
Share
A couple review the average return on an all-bond portfolio.

Like all markets, bonds fluctuate. Your returns will be based on what you hold, when you buy it, tax treatment and other factors. While many choose to diversify their portfolios across stocks, bonds and other assets, an all-bond portfolio may allow for more predictability and income generation. You can also diversify an all-bond portfolio with different products. Despite the various ways to set up a portfolio, you can estimate a return on an all-bond portfolio by looking at current yields. For example, a triple-A rated corporate bond you can expect a yield of about 5.6%. Or, if you purchase a ten-year Treasury bond, you can expect a yield of about 4.45%. That’s just the tip of the iceberg, though.

A financial advisor can help you determine the best way to set up an income-generating portfolio for your goals.

Why Invest in Bonds?

Bonds provide two main benefits for your portfolio: security and income.

A bond-based portfolio is generally secure. With a bond you aren’t an investor, you’re a lender – so you only lose money if the borrower defaults. There is still some risk here, but with creditworthy borrowers it’s low. Historically, for example, well-rated corporate bonds default between 0% and 0.38% of the time. 

These portfolios are generally also income-generating, meaning they issue regular payments while you hold them. Unlike regular stocks, you don’t have to sell off bonds in order to convert them to cash. You receive cash payments periodically, typically either every six months, creating a stream of income that can potentially last for decades depending on the details of your specific bonds.

The downside to all of this is that bonds tend to provide a low return compared to the rest of the market. Riskier assets like stocks and real estate may often outpace the returns of a bond portfolio.

Consider talking to a financial advisor to determine the best asset allocation for you.

Three Types of Bonds

Setting aside foreign investment, there are three types of bonds:

  1. Corporate bonds: Notes issued by a private company 
  2. Treasury bonds: Notes issued by the U.S. government 
  3. Municipal bonds: Notes issued by local governments

Creditworthiness is most important with corporate bonds. These can have a wide range of interest rates determined by an individual company’s credit, assets and reputation, and have the most risk associated with them since companies could theoretically default.

Two Types of Bond Returns

There are two main types of return for bonds: Yield and Capital Gains. 

Yield is based on the interest payments you receive for holding the bond. It is the ratio of interest you receive compared with what you paid for the bond. For example, if you receive payments of $50 per year on a bond for which you paid $1,000 for the yield would be 5%.

When you purchase a bond directly from the issuer, the yield and the interest rate are the same. When you purchase a bond from another investor, the yield can differ from the interest if you did not pay face value for the note. 

Capital gains may apply if you sell the bond to another investor at a premium. In our example above, say, if you were to sell the bond to someone else for $1,100, your market return would be 10% and may be subject to capital gains tax.

Note that the tax treatment on the bond returns varies depending on the circumstances. Consider talking to a financial advisor to ensure you have the right tax mitigation strategy.

Average Return on Bonds

An image showing bond market prices.

Measuring the return on a bond is not like measuring the return of a market asset. The yield on your asset will not fluctuate over time. It is fixed at the time of purchase. If you buy a bond at 6%, it will remain at 6% regardless of market activity. This reduces the value of long-term averages for investment decisions.

At the same time, average return for bonds is an extremely broad subject. Bonds will have different yields and market returns based on the duration of the note, the issuer, the rate structure and more. A 10-year Treasury bond, for example, will have an entirely different profile from a 30-year BBB corporate bond. 

However there are a few broad averages we can pull.

Overall Portfolio Return – 5%

If you build a portfolio entirely out of bonds, investing in different types over time, historically this would generate a 5% average return. This represents the return on a managed portfolio that combines interest and market returns.

Bond Index Return – Between 3.04% and 18.99%

The bond market may be accessed in index form, with individual investments reflecting the value of a variety of assets. Among bond indexes include: 

  • S&P 500 Bond Index: 10-year running average of 3.04%
  • Vanguard bond market index fund: 10-year average of 18.99%
  • Blackrock Aggregate Bond Index Fund: 10-year average of 11.68%
  • Bloomberg US Aggregate Bond Index: 10-year average of 11.6%

Average Return on Corporate Bonds – Between 5% and 6%

At time of writing, you can buy corporate bonds for an average yield of 5.46%. This would be your interest-based return if you built a 100% bond portfolio overnight. 

In the long run, if you were to only invest in AAA corporate bonds over time, you can expect a modern yield between 4% and 5%. Historic rates have been higher, sometimes up to 15%, leading to a 30-year average of 6.1%. However this is likely misleading, as corporate bonds have only averaged a yield above 6.1% once in the past 25 years. 

Discuss strategies to obtain the best return rates with a financial advisor.

Average Treasury Bond Yield – Between 4% and 5%

Perhaps the most representative asset offered by the Treasury is a 10-year bond. If you purchase a 10-year note at time of writing, you could expect a Treasury bond yield of about 4.3%. Based on yields over the past 20 years, you can expect average interest payments of between 3% and 4%.

Average Return on Municipal Bonds – 3.21%

The Bloomberg Municipal Bond Index is generally considered to be the municipal bond benchmark. Over the past 10 years it has averaged a 2.12% average annual return, although that figure has fluctuated from a 9.6% high to a -2.6% loss. This is consistent with the S&P 500 Municipal Bond Index, which has a 2.34% 10 year return. Remember, a financial advisor guide you through bond portfolios.

How to Manage an All-Bond Portfolio Over Time

Managing an all-bond portfolio requires periodic adjustments based on interest rates, credit conditions, and your financial goals. As interest rates rise or fall, the value of existing bonds can change, particularly those with longer durations. Monitoring the average duration of your holdings can help reduce interest rate risk. Shortening duration during periods of rising rates, or extending it when rates are expected to fall, may help stabilize your returns.

Bond laddering is another strategy that can help manage reinvestment risk over time. By spreading your bond investments across multiple maturities, such as 1-year, 3-year and 5-year notes, you ensure that part of your portfolio matures regularly. This allows you to reinvest in new bonds at current market rates, helping to smooth returns and reduce exposure to rate volatility in any single time frame.

As market conditions shift, you may also consider rotating between bond types. For instance, during periods of economic uncertainty, investors may increase their asset allocation to U.S. Treasuries for their lower default risk. In stronger economic environments, you might tilt toward higher-yield corporate bonds to seek improved returns. Managing credit quality is important; downgrades or defaults can impact both income and principal, especially in corporate or municipal bond holdings.

Finally, tax treatment should remain part of your ongoing management strategy. Interest income from bonds is generally taxable, but municipal bonds may offer tax-exempt income depending on where you live. For taxable accounts, tracking gains and losses can support tax-loss harvesting. You may also want to match maturing bonds to planned expenses, particularly in retirement, to reduce the need to sell holdings in unfavorable markets.

Bottom Line

A print out of bond indices and their prices.

The bond market is a wide field, with many different categories of assets. In general, you can expect a return of between 4% and 5% if you invest in this market, but it will range based on what you purchase and how long you hold those assets. 

Bond Market Tips

  • Bond funds aren’t necessarily as well known or as common as stock market index funds, but they can be an excellent way to get into this market. So it’s worth knowing how to find and invest in these assets.
  • A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Photo credit: ©iStock.com/AsiaVision, ©iStock.com/Torsten Asmus, ©iStock.com/aluxum