Quick disclaimer and one piece of long term historical context:
1) Disclaimer: The Barclays Aggregate Bond index started in 1976. Prior to 1976, almost all bond issuance (other than commercial paper) was 20 – 30 year tied to depreciation schedules. Therefore, we can’t tell what AGG would have since the duration is a fraction of the long bond in those periods. But with bond math, we do know the draws would have been much smaller. I have long bond data going back to 1926, but it has little to no relevance for our position in AGG.
2) Historical context: Intermediate bonds, as measured by the Aggregate, have annualized returns 4% GREATER than cash (Treasury Bills). Further, cash has produced a REAL return (T Bill – CPI) of 0.30%, barely outpacing inflation.
To answer the question directly, a couple of salient points to respond:
1) The data clearly show since 1976, in financial meltdowns, bonds have outperformed cash and provided a nice return enhancement. I’ll include 20% draws and less than 20% draws that seemed catastrophic for markets at the time (the tumult in 2001 due to 9/11, the tech bust of 2000, Iraq/S&L crisis in 1990, and the recession of 1981). As a related aside, these are also the only negative returns for the S&P over the past 35 years
| Year | T Bill ROR | AGG ROR | CPI | S&P ROR |
| 2008 | 1.35% | 5.24% | 0.10% | -37.0% |
| 2002 | 1.65% | 10.25% | 2.39% | -22.1% |
| 2001 | 3.69% | 8.44% | 1.55% | -11.9% |
| 2000 | 5.65% | 11.63% | 3.38% | -9.11% |
| 1990 | 7.27% | 8.95% | 6.10% | -3.11% |
| 1981 | 13.97% | 6.26% | 8.91% | -4.92% |
With the exception of 1981, you were better off in the AGG.
2) The Aggregate Bond Index did not exist in the malaise of 1973/1974 in which the S&P lost 14.5% and then 26%. At the same time, inflation rose from 3.4% at the end of 1972 to 8.8% in 1973 and then 12.2% in 1974. This is the environment I believe your question pertains to and the environment that would be most difficult for the model. During this stagflationary environment, LONG bonds (due to the coupon offsetting rates) were flat in 1973 and +0.66% in 1974! (Note: we simply merged the long corporate and long treasury index for this time period).
3) Further, in the rapid inflation and rising rate environment of 1976-1980, the AGG remained positive EVERY year:
1977 CPI jumped from 4.8% to 6.8%, AGG returned +3%
1978 CPI jumped from 6.8% to 9.03%, AGG returned +1.4%
1979 CPI jumped from 9.03% to 13.29%, AGG returned +1.9%
1980 CPI remains high at 12.52%, AGG returned +2.7%
It should also be noted that with the exception of 1977 (-7.2%), the S&P provided a positive return every year from 1975-1980. Stocks generally are positively correlated to inflation!
In summary, nearly 50 years of data tells us the Aggregate has been a better investment than going to cash.
