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

Jeffrey DeMaso

Portfolio Manager

There’s no sugarcoating it: 2022 has been the most challenging year in the bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. market in a generation.

BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. investors have had it pretty darned good for a long time. From 1975 through 2021, high-quality bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. 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 riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline.. 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. BondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. are down 15% so far this year, and the prospects for finishing the year in the black are slim.

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 yieldsYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. 5.1%. A bond’s yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. 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.