GMO examines why relying on historical returns can mislead investors, using bond markets to show how return components matter more than averages. The paper challenges the idea that past 7.6% bond returns imply similar outcomes, arguing today’s sub 1.6% yields point to far lower forward returns.
Quarterly Letter 3Q 2021
GMO
Ben Inker
Research
10 Pages
Key Takeaways
Historical Returns Mislead: Average 10-year Treasury returns were 7.6%, yet the most recent decade delivered just 3.4%, highlighting how backward-looking assumptions can distort expectations.
Yield Drives Outcomes: Roughly 6.0% of historical bond returns came from yield, but with current yields below 1.6%, future returns mathematically compress toward ~2.0%.
Forecasting Improvement Power: A simple yield-plus-roll model explains 71% of future return variation, suggesting forward-looking components offer more predictive value than historical averages alone.
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