- Long term equities outperform bonds (equity premium puzzle).
- However this kind of misses the nature of returns: in equity it is mostly the total return from "the principal" (and a little from dividends); in bonds it is principally income from coupons (assuming holding to maturity).
- What if you trade bonds actively (utilising changes in interest rates, credit worthiness, etc.)? Could you expect ~10 % analogous to what you see in some equity strategies?
Theoretically, actively trading bonds versus passively holding bonds shouldn't result in extra expected returns, assuming that you are holding on average more or less the same amount of bonds as before. In other words , the expected returns on timing the marketplace with respect to interest rates and credit spreads are theoretically zero in an efficient market. Obviously there are a lot of active fund managers around who disagree with that, otherwise they wouldn't be in business. However there are also a lot of managers in many asset classes who have failed to beat a simple long only strategy in recent years.