Can bond yields predict returns?

Have you ever wondered if the yield on a bond today can indicate how much money you will make in the future? After all, income is typically viewed as the principal driver of returns for bonds but how does that maxim square when put to the test? With bond yields looking attractive right now, we decided to analyse whether they are a reliable guide for predicting returns over the short term (1 year) and over a longer holding period (5 years) for US and European investment grade (IG) and high yield (HY) bonds.

What are yields and spreads today?

The following chart shows where corporate bond yields and credit spreads are today. Yields reflect the expected annual return from the bond while spreads are the difference in yield between a corporate bond and a government bond of similar maturity. You can think of spread as being the additional compensation the market is demanding to take on the credit risk of holding corporate bonds. i.e. the risk that the company may be unable to meet their debt repayments.

In Figure 1 we show yields and spreads with their axes aligned. Note that 100 basis points is equivalent to 1%. Aligning the axes helps demonstrate that around one percentage point of the yield on investment grade bonds is made up of spread while more than three percentage points of the yield on high yield bonds is spread i.e. additional to what you would receive if you held equivalent government bonds.

These yields sound tempting – they are certainly well above the average of the last 15 years – but do they mean you will get good returns? Let’s see what history tells us.

Are yields good at predicting returns?

Yields are like a weather forecast for bonds—they’re better at predicting the long-term outlook (5 years) than the short-term (1 year). By that we mean, a summer day is likely to be warm on average but narrow the number of days and it becomes less certain whether it will be sunny or raining. Here is the scoop:

• Euro IG bonds are the best at following this rule, with a strong connection (0.87 correlation) between starting yields and 5-year returns. This means the yield today has historically offered a good indication of what you could earn over time.
• US IG bonds (0.81) and US HY bonds (0.77) also show a solid link for 5-year returns.
• Euro HY bonds are less predictable (0.65 for 5 years and only 0.35 for 1 year). This may be partly explained by the relatively low government bond yields in Europe over the last decade which made Euro high yield more sensitive to changing credit conditions.

Source: Bloomberg, indices as per Figure 1. A correlation of +1 means that both variables have a strong association – the closer to 1 the stronger the link between yield and forward returns. Past performance does not predict future returns.

For short-term (1-year) returns, yields are less reliable across all bonds. This is because over one year there is less of a smoothing effect, so bond returns are more impacted by the immediate interest rate or economic environment. This tends to be more true for high yield bonds that carry greater credit sensitivity.

What returns might be expected?

We can look at the historical data and display the starting yield ranges against the subsequent one-year and five-year total returns (TR). This is called “forward total return”, which includes both the income and any price changes.

Source: Bloomberg, ICE BofA Euro Corporate Index, 31 December 1995 to 31 May 2025, yield to worst, total returns in Euro, monthly datapoints. An annualised figure is adjusted to represent return over one year, rather than a shorter or longer period. It allows comparisons to be made between returns over time periods of different length. Past performance does not predict future returns.

With Euro IG yielding 3.08% today, you could expect around 4-5% returns per year over 5 years, based on past trends.

Source: Bloomberg, ICE BofA Euro High Yield Index, 31 December 1997 to 31 May 2025, yield to worst, total returns in Euro, monthly datapoints. Past performance does not predict future returns.

Euro HY’s 5.52% yield today suggests strong 5-year returns, possibly around 6-7% per year, but 1-year returns could be bumpier.

Source: Bloomberg, ICE BofA US Corporate Index, 31 October 1994 to 31 May 2025, yield to worst, total returns in US dollar, monthly datapoints. Past performance does not predict future returns.

US IG’s 5.14% yield today points to about 5-7.5% annualised returns over 5 years.

Source: Bloomberg, ICE BofA US High Yield Index, 31 December 1997 to 31 May 2025, yield to worst, total returns in US dollar, monthly datapoints. Past performance does not predict future returns.

US HY’s 7.27% yield today could mean 6-7% returns per year over 5 years.

Today’s yield quoted after each table reflects the yield to worst on 23 June 2025. Please note that yields may vary over time and are not guaranteed.

The bottom line

The big takeaway? Yields are a better guide for 5-year returns than 1-year returns. If you are patient and can hold bonds for 5 years, today’s yields – especially for US HY (7.10%) and US IG (5.18%) – look promising. But short-term returns can be unpredictable, especially for riskier high-yield bonds.

While yields are a helpful starting point, they are not the whole story. Keep an eye on:

• Market conditions: Are interest rates rising or falling? We need to be mindful that the historical period covered from the mid-1990s to today included a general decline in yields and interest rates, which partly contributed to total returns often being above starting yield levels because bond prices rise when yields fall.
• Credit quality: Are the bonds you are buying safe or risky? Any defaults could diminish the return you get from a portfolio of bonds.
• Economic trends: Is the economy stable or shaky? Stable economic growth is supportive of corporate cash flows, which helps companies meet their debt repayments. Conversely, economic weakness could put stress on some companies, particularly more indebted, high yield borrowers.

Taken together, today’s bond yields can potentially signal what to expect in terms of forward returns, especially over 5 years. Euro IG and US bonds look particularly attractive for long-term investors. High-yield bonds can offer bigger rewards but come with more volatility. By combining yield information with a smart look at the market, you can make better choices for your bond portfolio.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

High-yield or “junk” bonds involve a greater risk of default and price volatility and can experience sudden and sharp price swings.