Bonds deliver better returns than stocks in last decade

Bonds of all kinds underwent a remarkable transformation in the 2000s. When the decade began, they were widely ignored by investors who poured money into stock markets that were rising by 20 percent annually.

But since the dot-com bubble burst in 2000, Treasury and corporate bonds have delivered better returns for investors than stocks have.

Mutual funds that hold government bonds with maturities longer than 10 years returned 8.13 percent over the decade. Corporate bond mutual funds earned 7.84 percent. Meanwhile, the Standard & Poor's 500 fell 23 percent.

Those results prompted lots of former stock investors to become bond fans. Many sought safety in Treasurys for what cash they had left after the 2008 market crash.

Since then, mutual-fund investors have pulled $235 billion out of stock funds and put $340 billion into bond funds.

This year, investment-quality corporate bonds have attracted investors who want better returns than CDs or money markets offer, but don't trust stocks.

Those same super-low interest rates that have turned investors away from CDs have also fed this corporate-bond boom. It's cheaper for corporations and governments to issue bonds, since they can finance projects without paying high interest.

The federal government has issued $1.4 trillion in Treasury bonds so far this year, a 115 percent increase from last year. So far, the government has found enough buyers, mostly foreign governments like China.

Trouble may lie ahead for bonds. The Federal Reserve will eventually have to raise interest rates to fight inflation. That will hurt investors who buy and sell bonds frequently because higher interest rates push bond prices down.

But before you start booing bonds, remember nobody expected them to perform as they did in the 2000s.