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U.S. Treasuries: the perils of hindsight
2/10/2026
Starting yields can cushion inflation losses or leave investors dangerously exposed.
In Robert Louis Stevenson’s adventure novel Treasure Island, a map shows the way to buried riches. It also draws those who follow it into dangers they barely understand. In recent decades, the experience of U.S. Treasury investors offered a similarly incomplete guide. Falling inflation and interest rates after 1980 generated handsome returns. Over time, the favorable conditions behind them came to be taken for granted.
As our Chart of the Week shows, rolling ten-year real total returns on 2-, 10- and 30-year Treasuries have varied sharply. Maturity mattered, but so did the point of entry. Investors who joined the great bond rally when yields were high locked in substantial interest income. As inflation and interest rates subsequently fell, longer-dated bonds also delivered large capital gains.
An influential study by economists Eugene Fama and G. William Schwert helps explain how inflation affects government-bond returns. When investors expect prices to rise, that expectation is usually reflected in a bond’s yield at the time of purchase.[1] But if inflation turns out higher than expected, investors lose purchasing power because the bond’s interest payments remain fixed while living costs rise.
By 2020, starting yields were exceptionally low. There was therefore little interest income to cushion the inflation shock that followed. Inflation eroded the purchasing power of fixed payments, while rising market rates pushed down bond prices. Longer maturities suffered most because more of their cash flows lay far in the future.
Shorter-dated Treasuries tell a different story, but not a more comforting one. Their low yields were insufficient to preserve purchasing power even while inflation remained subdued. As the chart shows, their rolling ten-year real returns had already slipped below zero by November 2017.
“Today’s higher yields have materially improved the starting point for bond investors,” says George Catrambone, Head of Fixed Income, Americas at DWS. “Patient investors now have a great opportunity to earn real income, but security selection remains critical. Fiscal risks, inflation and shifts in bond supply and demand can all complicate the route ahead.”
Whether the rewards justify the risks also depends on investors’ objectives, time horizons and appetite for risk. But the relevant starting point is today’s, not the painful record of recent years. Simply projecting that record into the future would repeat the mistake once made after decades of gains. Jim, the hero of Treasure Island, ends the novel vowing never to return to the “accursed island,” even though he believes some of the silver remains buried there. Bond investors should resist a similarly sweeping conclusion. Bad experiences can be just as misleading as good ones.
Sources: ICE Data Indices LLC, Bloomberg Finance L.P., DWS Investment GmbH as of 9/29/2026
* Rolling 10-year returns are computed as cumulative total returns over the trailing 10-year window ending each month. The inflation adjustment is based on the seasonally adjusted U.S. Consumer Price Index for All Urban Consumers.
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.