This year has not been a good year for bonds. This message has gotten a bit lost because it has been an even worse year for stocks so far. But bonds have generally not helped your portfolio recently, and it is worth understanding the dynamic of why that happened, and what the future could look like for bonds going forward.
The first thing to understand is that bond prices are inversely related to interest rates. This means that the bond values in your portfolio go up when interest rates go down and your bond values go down when interest rates go up. And as I’m sure you have noticed, interest rates have gone up this year which has been quite bad for most bonds. And of course, stocks have gone down at the same time which is not how we want a diversified portfolio to work. Ideally, the low correlation between stocks and bonds results in stocks going up when bonds go down and vice versa. So why didn’t that happen this year? One reason is that interest rates were managed by the Federal Reserve down to their lowest rates in history by the beginning of this year. So, bond prices benefitted as interest rates generally ratcheted down from 2008-2021, but then we felt the pain of the reverse effect this year as interest rates came back up toward historical averages.
There is some potential for good news as we look forward. First, the yields on bonds (your interest payments) have generally gone up this year so you should be able to get more interest from your bonds going forward. Over time, this will help to offset some of the price decreases. Also, now that interest rates have come back up, it means that future rates could go in either direction from here. For example, if we do end up in a recession later this year or next year, that might be bad for stocks but it could be good for your bonds if it results in interest rates coming back down again, even if just by a small amount.
So while bonds may not have helped your diversified portfolio this year, they can still play an important role going forward to reduce the risk inherent in your stock holdings and potentially offset stock market volatility in the future. To understand how bonds fit into your personal investment strategy, reach out to me or your personal investment manager for a customized review.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Neil Manning, CFP, AIF, CDFA, FSA
I am a reformed actuary turned financial advisor, helping my clients with everything from investments to retirement projections to LTC insurance since 2014. Unlike most normal people, I love numbers and finance – I’m currently reading a book about game theory which my wife and two teenage daughters think is unbelievably boring (they are wrong). For more details about my background, check out my website below.