2022 was certainly an interesting year in the markets, with the US Federal Reserve playing an outsized role in the headlines with their efforts to rein in stubborn inflation by embarking on the most aggressive interest rate-hiking campaign in over thirty years. When interest rates rise, bond prices fall. As a result, the rapid rise in rates during 2022 resulted in the worst bond market returns in recorded market history.
So, with that as a backdrop, how should we view bonds moving forward? Bonds usually function as a “safe haven” asset within a portfolio. However, the chart above shows that even bonds can have bad years, performance-wise. Since 1976, the Bloomberg US Aggregate Bond Index has had negative returns five times. However, when negative returns are primarily a result of rising interest rates, it increases the forward-looking return potential for bonds since higher interest rates translate to higher yields!
As a result, we are optimistic regarding the forward-looking return potential for bonds. Currently, bond yields are much higher now than they have been in recent history, especially on the shorter end of the yield curve. These higher yields are especially helpful to those who are going into retirement, who may be reducing their portfolio’s exposure to stocks in exchange for a larger allocation to bonds.
At Master’s, our internal Investment Review Committee meets regularly to adjust our managed portfolios, where appropriate, based on the current market and interest rate environment. This is especially important during volatile market environments like we are in today. If you would like to dive deeper into this topic, see our recent market update webinar https://www.youtube.com/watch?v=QmxL2Aavpbg where our team gives more context to the current bond environment.
Next week, Garry will continue our investment series with an assessment of how the U.S. consumer has behaved post-stimulus.
Past performance is no guarantee of future results. Actual returns may be lower. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Securities offered through Securities America Inc., member FINRA/SIPC. Master’s Advisors is not affiliated with the Securities America companies. Advisory services offered through Securities America Advisors Inc.