Chart of the Week: The Upside to Bonds’ Down Year

Chart of the Week: The Upside to Bonds’ Down Year

October 24, 2022

There’s no sugarcoating it: 2022 has been the most challenging year in the bond market in a generation.

Bond investors have had it pretty darned good for a long time. From 1975 through 2021, high-quality bonds returned 7% on average and typically only declined 3% from their highs during each calendar year. That’s an attractive level of return with little downside risk. The worst intra-year decline was a 9% dip in 1980—more than four decades ago—and bonds still finished that year up 2% or so.

Then 2022 happened. Bonds are down 15% so far this year, and the prospects for finishing the year in the black are slim.

Chart shows calendar-year returns and the largest intra-year declines for the Bloomberg U.S. Aggregate Bond index from 1976 through September 2022.
Note: Chart shows calendar-year returns and the largest intra-year declines for the Bloomberg U.S. Aggregate Bond index from 1976 through September 2022. Sources: JPMorgan, Bloomberg.

That said, there is a silver lining to this story. The outlook for bonds has improved dramatically. The Bloomberg U.S. Aggregate Bond index—a broad measure of high-quality bonds—now yields 5.1%. A bond’s yield has historically been a good predictor of its long-range future return; if that holds true from today onward, it’s reasonable to expect bonds to return around 5% per year over the next decade.

So yes, it’s been a challenging year. But if bonds made sense as part of your long-term financial plan at the start of 2022, they have an even greater role to play in the years ahead.


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