Home Guides & Resources chevron_right Economy and the Markets Chart of the Week: Are Bonds Back? Published February 6, 2023 Chris KeithSenior Vice President, Fixed Income Manager You’ve probably heard by now—2022 was the worst calendar year on record for bonds. But what you may not know is that the bond market recorded its second-best January of all time, kicking off 2023 with a 3.1% gain. The strong start to the year restores confidence to bond investors who were understandably disappointed with how this “safe” asset class performed last year. Note: Chart shows top 10 January returns for the Bloomberg U.S. Aggregate Bond index from inception (1976) through 2023. Source: Bloomberg. Right now, two questions come to mind when assessing recent performance: 1. Have we seen a market bottom for bonds? We don’t make these kinds of calls at Adviser, but we like where we are right now. If in fact the bottom is in, then it occurred in late October 2022. Since then, bonds have returned 7.8%. There’s more ground to make up, but just as bonds didn’t drop all at once, neither will they recover all at once. Thanks to the higher yields born from last year’s sell-off, investors who reinvest interest, dividends and principal as bonds mature are benefiting not only from higher income, but also from prices trending higher. It was challenging at times last year, but we had a high degree of confidence that bonds would once again add value to investor portfolios. That has been the case over the last few months. 2. How is it that bond prices are rising if the Federal Reserve is still hiking? Investors seem to believe the Fed will eventually need to reverse course on its interest-rate policy. Hence, they are pricing a lower fed funds rate into the markets now. When investors anticipate lower interest rates, and thus lower yields, prices rise on bonds. This theme is contributing to recent gains. It is our belief that the Fed will get to a point where it stops hiking and then stand pat without cutting rates—the “higher for longer” mantra we hear some analysts embracing. The job of wrangling inflation down to acceptable levels has begun, but it’s not over. If the central bank acts in accordance with its messaging to date (and I have every reason to believe it will), we’ll see lower interest-rate policy once inflation is in check. My takeaway: Bonds have been pulling their weight again over the last few months, delivering higher income and positive total returns. Investors who have locked in higher yields should benefit from that higher level of income even if prices turn lower unexpectedly. This material is distributed for informational purposes only. The ideas and opinions contained herein should not be viewed as recommendations or personal investment advice. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Our statements and opinions are subject to change without notice. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs. For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here. © 2023 Adviser Investments, LLC. All Rights Reserved. Tags: bondsChart of the WeekChris Keithmanaged bonds