Why is bond market not doing well?
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
How bad is the sell-off? In 2022, the bond market suffered its worst year on record, as the Federal Reserve started raising interest rates aggressively to fight high inflation. This year, the picture hasn't improved much.
Why did the Treasury bond market crash in 2022 and 2023? Interest rates and the price of bonds have an inverse relationship. As interest rates go up, the market value (price) of bonds declines. When the Federal Reserve raises the federal funds rate, it can cause the bond market to crash.
Bond funds staged a fourth-quarter comeback in 2023. Through late October, the Morningstar US Core Bond Index, a proxy for the broad fixed-income market, was on pace for a third-consecutive year of losses as uncertainty around a hard or soft landing lingered and interest-rate volatility persisted.
The fixed rate rose to 0.4% in November 2022 so any I bond purchased after that date should be held. Likewise, you may want to hold on to I bonds issued between May and October 2023. Those I bonds have a fixed rate of 0.9%, which is the highest fixed rate in 16 years.
“Although some volatility may continue, we believe interest rates have peaked,” predicts Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. “We expect lower Treasury yields and positive returns for investors in 2024.”
If you own shares of a bond ETF, you might have a sinking feeling seeing the market value of your investment dip as interest rates increase. However, it's worth noting that rising interest rates can't last forever, and bond ETF prices are likely to recover once rates go lower.
According to research by Edward McQuarrie, a professor emeritus at Santa Clara University, 2022 was the worst year ever for the bond market in the United States since records began.
And we believe bonds will continue to play a valuable role in offsetting stock losses over the long term. "Diversification benefits are back," said Sara Devereux, global head of Vanguard Fixed Income Group. "2022 was a highly unusual year. Over the long term, bonds continue to be a great diversifier to equity stress."
In line with the outlook from other investment providers, the firm is forecasting a 5.7% gain in 2024 for U.S. investment-grade bonds, versus 4.9% last year and 2.3% in 2022. (All figures are nominal.) Schwab's 10-year return expectations are well below each asset class' returns from 1970 through October 2023.
Where are bonds going in 2023?
- Bond market volatility was high during the first half of the year.
- Yields for Treasury securities maturing in two years or more are nearly unchanged.
- The 2-year/10-year yield curve is still inverted, but has stabilized.
- Year-to-date returns have been positive so far this year.
Bonds are back to being bonds in 2023, as we believe higher income will drive investment grade returns. Investment grade bond yields are now at 13 year highs hovering around 5%, which provide investors with more downside protection from a slowing economy and wider credit spreads.
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|---|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
Moving 401(k) assets into bonds could make sense if you're closer to retirement age or you're generally a more conservative investor overall. However, doing so could potentially cost you growth in your portfolio over time.
You can get your cash for an EE or I savings bond any time after you have owned it for 1 year. However, the longer you hold the bond, the more it earns for you (for up to 30 years for an EE or I bond). Also, if you cash in the bond in less than 5 years, you lose the last 3 months of interest.
Despite Treasuries' recent rally, yields remain very compelling, with the US 10-year Treasury now yielding 3.9%. For bond investors, these conditions are nearly ideal. After all, most of a bond's return over time comes from its yield. And falling yields—which we expect in the latter half of 2024—boost bond prices.
Top four schemes in the category offered over 7%. ICICI Prudential Corporate Bond Fund, the topper in the category, offered 7.60% in 2023. Aditya Birla Sun Life Corporate Bond Fund offered 7.29%. HDFC Corporate Bond Fund gave 7.20%.
Key Takeaways: Growth stocks may see a robust 2024 on the strength of trends such as AI disruption and decarbonization. Small-cap stocks are trading at attractive valuations as analysts see the possibility of a rebound in 2024. The time could be right for locking in rates on long-term, high-yield bonds.
What causes bond prices to fall? Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value.
Including bonds in your investment mix makes sense even when interest rates may be rising. Bonds' interest component, a key aspect of total return, can help cushion price declines resulting from increasing interest rates.
How long will it take for bond funds to recover?
The table on the right shows that bond prices often recover within 8 to 12 months. Unnerved investors that are selling their bond funds risk missing out when bond returns recover. It is important to acknowledge that some of those strong recoveries were helped by bond yields that were higher than they are today.
Implications for the Economy: The bond market serves as a barometer for the broader economy. A sustained bond market collapse can signal concerns about economic stability, potentially leading to shifts in government policies and impacting job markets, inflation rates, and interest rates on various financial products.
If sold prior to maturity, market price may be higher or lower than what you paid for the bond, leading to a capital gain or loss. If bought and held to maturity investor is not affected by market risk.
The 1994 bond market crisis, or Great Bond Massacre, was a sudden drop in bond market prices across the developed world. It began in Japan and the United States (US), and spread through the rest of the world.
We expect generally good performance during the second half of the year, although volatility may increase, especially for high-yield bonds. Corporate bond investments generally performed well during the first half of the year.
