U.S. bond investors have seen muted results relative to overseas peers. The Vanguard Bond Index Funds Vanguard Total Bond Market ETF recorded a 1-year total return of 3.1% and a 5-year total return of -1.6%. Those figures stand in stark contrast with returns from leading U.S. equity ETFs and a selection of international ETFs tied to developed markets and Asian equities.
Domestic equity ETFs have generated substantially higher returns over the same horizons, with 1-year gains above 19% and cumulative 5-year returns exceeding 70%. At the same time, U.S. bond yields have moved higher - a recent 20-year auction yielded 5.163% - which has put downward pressure on bond prices and constrained total returns despite the higher income on offer.
U.S. bonds: modest returns, low volatility
The Vanguard Total Bond Market ETF illustrates the divergence clearly: a modest 3.1% total return over 12 months and a negative return across five years, -1.6%. While bond volatility in the U.S. remains substantially lower than equity volatility, the core story is the growing gap between fixed-income returns at home and equity or international returns.
Higher nominal yields - evidenced by the 20-year result at 5.163% - have translated into price declines that offset some of the yield advantage when total return is calculated. That dynamic has been central to the underperformance of U.S. bond benchmarks relative to other asset classes and regions.
Euro and Asian proxies outpace U.S. bonds
International ETFs tied to developed markets and Asian equities have posted much stronger total returns. For example, the Vanguard TaxManaged Funds Vanguard FTSE Developed Markets ETF returned 24.0% over one year and 59.4% over five years. The iShares Trust iShares Core MSCI EAFE ETF returned 17.6% for the one-year period and 51.9% across five years.
Japan-focused exposure represented by the NEXT FUNDS TOPIX Exchange Traded Fund surged 40.9% over one year and 138.0% over five years, reflecting regional equity strength and accompanying currency movements that can benefit local assets and, by extension, local bond proxies.
These international returns have been supported, according to available data, by relatively lower inflation in some regions, more accommodative central bank stances in Europe and parts of Asia, and greater currency stability relative to the U.S. dollar. Those factors have combined to produce stronger total-return outcomes outside the U.S.
Return comparison
| ETF | Region | 1Y Total Return | 5Y Total Return |
|---|---|---|---|
| Vanguard Bond Index Funds Vanguard Total Bond Market ETF | U.S. Bonds | 3.1% | -1.6% |
| Vanguard TaxManaged Funds Vanguard FTSE Developed Markets ETF | Europe/Dev | 24.0% | 59.4% |
| NEXT FUNDS TOPIX Exchange Traded Fund | Asia | 40.9% | 138.0% |
| iShares Trust iShares Core MSCI EAFE ETF | Europe/Dev | 17.6% | 51.9% |
Macro backdrop and drivers
Three forces emerge from the available information as central to the divergence between U.S. bond returns and those in Europe and parts of Asia: elevated U.S. rates, more accommodative policies elsewhere, and differences in inflation trends. The Federal Reserve's aggressive hiking cycle has pushed yields higher in the U.S., pressuring bond prices. In comparison, the European Central Bank and the Bank of Japan have shown more accommodative postures, which has tended to support local bonds and currencies.
Inflation readings are described as relatively stickier in the U.S. than in Europe or Japan. That persistence in U.S. inflation has kept yields elevated and limited price appreciation for domestic bonds, whereas lower inflation abroad has helped local assets perform better on a total-return basis.
Bottom line
Although U.S. bonds now offer higher yields, total-return performance over both one- and five-year horizons has lagged a range of international ETFs, especially those tied to developed European markets and Japan. The reported drivers are higher U.S. yields, stickier inflation at home, and divergent central bank policies. According to the available analysis, a change in those conditions - specifically a Fed policy pivot or a notable cooling in U.S. inflation - would be necessary for U.S. bond total returns to catch up with global peers.