Increasingly, investors are questioning whether the tried-and-true 60/40 paradigm is still relevant after a two decades-long reign. Those concerns may be justified. Take a look at this chart, and I'll explain. (THREAD) 
Investors are reacting to the back-up in rates from their historically low levels amid persistent, high-inflation prints. The chart above shows that over the long term, forward bond returns have an inverse relationship to their current yield (or valuation). /2
The chart shows the long-term Government bond yield (using the Ibbotson SBBI series), which on average has a maturity of around 20 years (give or take). Overlaid is the 20-year forward return. /3
It’s not unlike the Shiller CAPE model for equities, which holds that the 10-year forward return is inversely proportional to the trailing 10-year P/E ratio. /4
We all know that bonds held to maturity will return the coupon but nothing else, more or less (at least in nominal terms). At a long-term yield of 2% and inflation north of 5%, bonds are not exactly a screaming bargain right now. /5
The last time that yields were this low (the 1940s and 50s), the volatility of bond returns was also extremely low. Those were the financial repression days. /6
We can run a simple regression of the yield and forward return to come up with a model for predicting future nominal returns. The result is shown below and reveals a very close fit between yields and forward returns (the R-squared is 0.94). /7
The unfortunate conclusion is that investors who buy long-dated government bonds today should expect to earn only 2% nominal if they hold these bonds to maturity. /8
Even if inflation reverts back to its 2% trend from the past decade, that means bond investors will earn a zero real return over the next 20 years or so. And if we have entered a structural inflation regime, it could be a lot less than zero. /END
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