Bonds Brief: Third Quarter 2022

Bonds Brief: Third Quarter 2022

Even in the most difficult days, bonds continue to do their job. They produce income and balance risk. It did not always feel that way over the first half of the year, as the market value of individual bonds fell along with the major indices, but our bonds continued to earn and pay interest when due.

In addition to the self-healing quality of bonds, there are a few reasons I believe bonds are poised to break out of their first-half slide.

Bonds continue to offer an alternative. If you’re concerned about the economy and what the future holds for investors in all asset classes, then an allocation to bonds is a reasonable alternative. And just like with the stock market, you can be selective in where you invest within the bond universe, be it high-quality or junk, long- or short-duration, Treasury or corporate or inflation-protected.

Yields are higher. This is what we’ve been longing for. Prices on bonds dropped, yields rose, and our reaction was to take advantage when and where we could. Higher yields mean more return and more income—something we all can use. We stuck to the plan in our portfolios, confident that we would reap the rewards for doing so.

The economy may in fact weaken. I’m not rooting for a recession. At the same time, I recognize that if the Federal Reserve is to be successful in its battle to tame inflation, a period of slower economic activity is a clear possibility. As my colleague Jeff DeMaso noted in a recent Chart of the Week, consumer and business pessimism reigns.

It’s against this backdrop that bonds will continue to be a valuable offset to stock market volatility and an even better source of income heading into the summer and fall. The turnaround may have already begun, as the Bloomberg U.S. Aggregate Bond index returned 2.9% in July.


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