In Real Squeeze, -1% Guaranteed Real Real Return! Yummy??, and Historical Sources of Bond Returns, I offer some historical perspective on the only sources of bond returns: inflation, real returns, and credit. Assuming no credit risk in US Treasuries (probably not a good assumption given this Bloomberg quote on CDS on US Treasuries), the formula is fixed, and all inputs except inflation are provided ex-ante. While bond prices can fluctuate wildly (Extreme Bond Returns), the experience over the life of a bond and a bond index is predetermined by the yield to maturity. Unfortunately, that guaranteed experience in inflation or deflation is not so pleasant.
While everyone should know R, I understand that some readers would prefer an easier route. FRED as usual comes to the rescue. Unfortunately though, labeling is not allowed. The codes can be translated as follows:
- DBAA = total return on BAA
- DBAA – (DGS10 – DFII10) = credit return
- DGS10 – DFII10 = inflation (expected)
- DGS10 = real return
In the spirit of continuous improvement, here is the chart now using lattice and latticeExtra.