As Dickens said, “It was the best of times. It was the worst of times.” That’s certainly true for the bond markets today. The Bloomberg US Aggregate Bond Index is close to setting a personal worst – logging three consecutive negative calendar year returns. It lost 2% in 2021. It lost 13% in 2022 (10% worse than its previous worst year ever). It’s down 3% year-to-date in late October. How did this happen? And how is this also the best of times?
The pain in bond market returns was caused by interest rates rising about 5% across the board in under two years. Bonds were coming off very low interest rates and had little income to offset principal losses. My clients fared a bit better than that because we carried less interest rate risk than the benchmark, but that’s another story.
The good news is that you get paid 5.5%-6% on a high-quality bond portfolio today. Conservative savers/investors should be rejoicing. You can earn 6% and take very little risk. Sure, there’s a risk that interest rates will continue to go higher, but now you have high interest payments to offset that if it happens. And there’s a chance that interest rates will top out soon.
With such good returns and very little risk, you might want to review your stock/bond mix. You can set yourself up for good returns by adding more high-quality bonds to your portfolio, if you’re interested. I’ve been talking to a few clients about this lately. I expect to discuss it with many more over the next few months.
About the Author: John O’Connor
John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.
Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.