Fixed Income Returns: Bonds vs. Inflation & M2 (1986-2024)

If you’ve ever been told to put a portion of your portfolio in bonds, this article is for you.

Bonds have been a cornerstone of mainstream financial advice for decades. They’re stable, they pay interest, and they’re supposed to protect you when stocks fall apart. But how did they actually perform over the last 39 years when measured against real benchmarks?

This article looks at seven common US fixed income investments from 1986 to 2025 and runs their returns against CPI (the official inflation measure), M2 (the money supply), gold, and the S&P 500. The goal isn’t to tell you bonds are bad. It’s to show you what they actually did for your purchasing power, so you can decide for yourself whether they belong in your portfolio.

What Is Fixed Income?

Fixed income is when you lend money to a government or company, and they agree to pay you back with interest on a set schedule. The return is predictable, and the risk is (usually) lower than stocks.

Financial advisors have recommended bonds for decades, especially as part of the classic 60/40 portfolio (60% stocks, 40% bonds). The idea is that stocks grow your wealth over time while bonds protect it when markets get rough.

Bonds also play a big role for people near or in retirement. Fixed income gives you more stability than the stock market. No one in retirement wants to watch their life savings decrease by 20% to 30% during a bear market.

But stability isn’t the same as growth. This article runs the numbers on seven common US fixed income investments from 1986 to 2025 and benchmarks them against CPI (Consumer Price Index), M2 (the money supply), gold, and the S&P 500.

Types of Fixed Income Investments

This analysis covers seven fixed income categories. Here’s a quick breakdown of each.

Cash and Cash Equivalents (3-Month Treasury Bills)

When investment analysts say “cash,” they don’t mean dollars in a checking account. They mean 3-month Treasury bills (T-bills) issued by the US government. T-bills are extremely short-term, highly liquid, and barely move when interest rates change. They’re essentially the risk-free baseline of fixed income.

US Treasury Bonds

Treasuries are loans to the US federal government. There are three main durations in this analysis:

• Short Term Treasuries: maturities around two years. Low risk, lower yield than longer bonds.
• 10 Year Treasury: the benchmark bond that most analysts and economists watch closely. More yield than short-term, more risk too.
• Long Term Treasuries: 20 to 30 year maturities. The highest yields the government offers, but also the most sensitive to interest rate swings.

Investment Grade and High Yield Corporate Bonds

Corporate bonds work the same way as Treasuries, except you’re lending to a company instead of the US government. Companies can go bankrupt, while the US government cannot. Because corporate bonds carry more risk, investors want a higher yield to compensate for that.

• Short Term Investment Grade: bonds from financially strong companies (BBB credit rating or higher) with 1 to 5 year maturities.
• Long Term Investment Grade: same strong companies, but 10 to 30 year maturities.
• High Yield Corporate (also called “junk bonds”): bonds from companies with lower credit ratings (BB or below). Higher default risk, but higher potential returns.

Fixed Income CAGR Analysis (1986-2025)

Every fixed income category posted a positive nominal CAGR (compound annual growth rate) over the 39 year period. In plain terms: none of them lost money on paper.

Here’s how they ranked from best to worst:

High Yield Corporate bonds led the pack at 6.97%, followed by Long Term Investment Grade at 6.74%. Cash brought up the rear at 3.18%.

The pattern makes sense. Longer duration and higher credit risk tend to come with higher yields over time.

Growth of $10,000 Over 39 Years

Here’s what a $10,000 investment in each asset would have grown to by 2025:

The difference between the best and worst options is pretty eye opening. High Yield Corporate turned $10,000 into nearly $139,000, while cash turned it into $33,819.

An almost 4% difference in CAGR was a difference of $100,000 over 39 years. Imagine what the numbers would have looked like if you invested more than $10,000! Those differences in CAGR compound over time.

How Bonds Stack Up: The Full Benchmark Comparison

Now let’s put everything in context. The table below shows every fixed income category alongside the four benchmarks: CPI (2.75%), M2 (5.51%), gold (6.27%), and SPY (11.31%).

For a deeper look at what M2 growth means for your money, see my US money supply analysis. For the full picture on long-term asset returns, check out my annualized returns analysis.

vs. CPI: Bonds Cleared the Bar

Every fixed income option beat consumer inflation. Even cash at 3.18% cleared the 2.75% CPI bar. Bonds preserved purchasing power against the official measure of price increases across the board.

Bonds did their job here. You’re not trying to get richer, you’re trying not to get poorer. The income provided by bonds allowed you to keep up with the increase in consumer prices.

vs. M2: A Much Harder Test

The M2 column is where the story gets uncomfortable. M2 is the broad measure of money in circulation. When M2 grows at 5.51% per year, each existing dollar represents a smaller share of total money in the economy. If your investment doesn’t beat 5.51%, the money supply is expanding faster than your wealth. You’re not losing on paper, but in real terms you’re losing ground. This is what’s sometimes called purchasing power erosion (your money buys less even when the balance goes up).

Only three fixed income categories beat M2: High Yield Corporate (+1.46%), Long Term Investment Grade (+1.23%), and Long Term Treasury (+0.76%). Those margins are thin. Everything else lost ground to money supply growth, with cash coming in at -2.33% annually against M2.

The 10 Year Treasury essentially broke even against M2 at +0.11%. Over 39 years, that’s barely treading water.

So, only High Yield Corporate, Long Term Investment Grade, and Long Term Treasuries provided real wealth over this time period.

If you were someone in retirement and didn’t care about growing your wealth, then you’re okay with these results. But if you were an adult who had bonds in your portfolio, would you be okay with some of them not growing your wealth over time?

vs. Gold: Only the Top Three Kept Up

Gold posted a 6.27% CAGR over the same period, which puts it right at the Long Term Treasury level. Only High Yield Corporate (+0.70%) and Long Term Investment Grade (+0.47%) beat gold. Everything else fell short. Cash trailed gold by 3.09% per year, which compounds into a massive gap over 39 years.

Gold is often seen as a hedge against currency debasement. The fact that most fixed income options couldn’t keep up with it over this period says something about what bonds are actually protecting you from (and what they’re not).

vs. SPY: Not Even Close

The S&P 500 column is the most sobering. SPY turned $10,000 into $630,031 over the same 39 years that High Yield Corporate bonds, the best-performing fixed income category, turned it into $138,987. Every single bond category underperformed SPY by more than 4% per year. Cash trailed by 8.13% annually.

Bonds and stocks aren’t competing for the same job. But if your goal is building wealth over decades, the data makes a clear argument for where the bulk of your money should be working.

The Bond Bull Market That Won’t Come Back

Before you take these numbers at face value, there’s a critical piece of context. The 1986 to 2025 period was one of the greatest bond bull markets in history. In my opinion it’s not going to happen again.

After the US abandoned the gold standard in 1972, inflation became a serious problem. The Federal Reserve’s response was to raise interest rates aggressively. By the early 1980s, the Federal Funds Rate hit 19%. When rates are that high, bonds issued at those levels lock in exceptional yields.

At the start of 1986, when this analysis begins, the Federal Funds Rate was 8.14% and the 10 Year Treasury was yielding 7.22%. That’s a dramatically different starting line than what investors face today.

From those highs, rates spent the next four decades mostly falling. When rates fall, existing bond prices rise. Bond investors got paid twice: once through yield, and once through price appreciation. That tailwind is behind every number in this analysis.

Why That Tailwind Is Gone

The Federal Reserve was able to raise rates that aggressively in the 1980s because US Debt to GDP was around 33% in 1980. That ratio is now over 120%.

For more on what that means for investors, see our article on investing in a high Debt to GDP world.

In 2024 alone, the US government paid roughly $880 billion in interest on the national debt at an average rate of about 3.32%. If rates go significantly higher and stay there, that interest bill explodes. The government would have to borrow even more just to cover what it already owes.

That’s fiscal dominance (when the debt load starts limiting what the Federal Reserve can actually do with interest rates). Short and intermediate term Treasury yields are essentially capped by how much debt the government can service. The Fed has far less room to maneuver than it did in the 1980s.

Long Term Treasuries are a slightly different story. They’re less directly controlled by the Fed Funds Rate, and if investors lose confidence in US fiscal policy, they might demand higher yields on 20 and 30 year bonds even if short rates stay low. Something worth watching, but not a reliable tailwind.

The bottom line: the conditions that made 1986 to 2025 such a strong period for fixed income are gone. Starting yields are lower. Rate-cutting room is limited. And the debt math constrains what can happen next.

Are Bonds Worth It for Long-Term Investors?

The data makes it hard to argue for bonds as a wealth building tool. The M2 CAGR from 1986 to 2025 was 5.51%. Most fixed income options don’t clear that bar. And the conditions that allowed the best performing bonds to barely beat it aren’t coming back.

At the same time, bonds aren’t meant to build wealth for most people. They’re meant to preserve it. For someone already in retirement, or within a few years of it, that’s the right tool. You can’t afford a 40% drawdown. A portfolio that holds up during a crash and pays steady income does exactly what it’s supposed to.

If you’re earlier in your investing life and focused on building real wealth, the data points toward equities. The S&P 500 sector performance analysis and US equity style returns show what’s been possible on the equity side over the same timeframe.

My own view: bonds don’t make sense for me at this stage of life. I want assets that can outpace money supply growth, not just keep up with official inflation. But that calculus changes as retirement gets closer, and I’ll adjust accordingly.

Fixed income is still worth understanding. It’s a major part of the financial system, it dominates most institutional portfolios, and it plays a real role in retirement planning. The goal here isn’t to dismiss bonds. It’s to look at them with clear eyes.

Frequently Asked Questions

What was the best fixed income investment over the long term?

From 1986 to 2025, High Yield Corporate bonds had the highest CAGR at 6.97%, followed by Long Term Investment Grade at 6.74%. Both were the only fixed income options that meaningfully outpaced M2 money supply growth, though the margins were thin.

Did bonds beat inflation?

Yes, over the 1986 to 2025 period, all seven fixed income categories beat CPI inflation (2.75% CAGR). Even cash at 3.18% came out ahead. But beating CPI and beating the rate of money supply growth (5.51%) are two different things, and only three bond categories cleared the M2 bar.

What is the 60/40 portfolio?

The 60/40 portfolio allocates 60% to equities (typically the S&P 500) and 40% to bonds. The idea is that stocks provide long-term growth while bonds reduce volatility and cushion drawdowns during market downturns. It’s a widely used strategy, especially for investors approaching retirement.

Why did bonds perform so well from 1986 to 2025?

Because interest rates started very high (the Federal Funds Rate was over 8% at the start of 1986) and spent most of the next four decades declining. Falling rates push bond prices up, giving bondholders both yield income and price gains. That combination is unlikely to repeat given today’s debt levels and much lower starting rates.

Is cash a good investment?

Cash (3-month Treasury bills) posted a 3.18% CAGR from 1986 to 2025, which barely beat CPI but lost badly to M2 growth (-2.33% annually). Holding cash long-term means your purchasing power erodes relative to the expanding money supply. It’s fine as a short-term parking spot, but a poor long-term strategy.

What is M2 and why does it matter for investors?

M2 is a broad measure of money in circulation, including cash, checking accounts, savings accounts, and money market funds. When M2 grows, each existing dollar represents a smaller share of total money in the economy. Benchmarking investment returns against M2 shows whether you’re actually gaining or losing ground relative to money creation. See our full M2 analysis here.