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Macro trends and long-horizon returns

We outline a macro-finance model for simulating long-horizon returns on government bonds and multi-asset portfolios. We show how the determinants of return distributions change across different investment horizons, and discuss differences in prospective returns on long and short-duration bonds.

23 August 2023


  • We outline a model for simulating forward-looking return distributions for short and long-duration government bond and multi-asset portfolios, over different investment horizons. The model anchors the yield curve to expectations of long-term inflation and output growth - which we refer to as “macro trends” - and allows for uncertainty around these trends going forward.
  • Yields on government bonds have been declining over the last four decades. A large part of the decline in yields can be attributed to declining macro trends, generating high returns on government bonds, especially those with long duration. Looking ahead, the evolution of macro trends will be a key driver of long-term returns. We show how the impact of trends on returns differs depending on bond duration and investment horizon.
  • Our framework allows us to make quantitative comparisons of prospective long-term returns. Using a realistic calibration, we show that it is unlikely that long-duration bond returns will match the experience in the last few decades. When assuming that trends are flat on average, the return distributions of short- and long-duration bonds are comparable, despite long-duration bonds earning a term premium. For long-duration bonds to generate returns closer to historical experience, long-term growth prospects would likely need to deteriorate from today’s levels.
  • We extend the model to include equity prices alongside the yield curve, and simulate multi-asset return distributions for portfolios with short- and long-duration bonds. When assuming a negative correlation between equity and bond returns, long-duration bonds lower the volatility of a multi-asset portfolio more than short-duration bonds. This improves this distribution of returns over long horizons. These diversification benefits can be large enough to counter the effects of higher macro trends. This result partly depends on the negative equity-bond correlation, however, and the benefit from long-duration bonds is smaller when the correlation is positive or zero.

Download the discussion note (pdf)