The Worst Bond Year Ever Was 2022 – What Does That Mean For You?

According to the Barclay’s U.S. Aggregate Bond Index, 2022 was the worst year in since they started recording in 1976 for bonds. Since 1976 in fact, we’ve only have 5 negative years in the bond market. Last year, 2022, was historically bad – down 13%. Why was it so bad and what does it mean for you?

Why Was The Bond Market So Bad In 2022?

To understand why the bond market was so awful last year, it helps to know that bonds and interest rates are inversely related. Bonds are mostly flat-rate bonds, meaning that when they are issued it s with a flat interest rate that is paid over the life of the debt security. So for example if you own a bond paying a flat 2% and the current interest rate, which is what new bond issues are based on, are at 5%, why would anyone buy the 2% bond? They would buy it only when offered at a discount.

When you hold a bond to entire maturity, the daily value fluctuates based upon credit quality and interest rates, so despite the fact that you’re holding the bond to maturity and you get your entire principal back (along with the interest you earn along the way) market dynamics change the price of the bond daily.

The Fed can use interest rates to stimulate or slow the economy. With the economy slowing the fed manipulated interest rates over the last few years – first lowering them, and then raising them. Currently the Fed has a dual mandate to both keep inflation low and keep unemployment low, so they have been raising rates to slow the economy and cool off inflation. This resulted in a hit to bonds, since bond prices and interest rates are inversely correlated.

What Does It Mean For You?

So what does the poor bond market in 2022 mean for you, and what might it look like in 2023? To begin with, it appears that what the Fed is doing is working and inflation is starting to come down – it looks like we’ll land somewhere with interest rates in the 5%- 5.25% range. This provides an opportunity to purchase attractive bonds for a long period of time. Within the span of a year, you’re looking at a bond market that went from the worst ever to a particularly attractive sector. While anything can happen, there are signs that things will improve within the bond market.

Disclosure: Diversified, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the SEC. A copy of Diversified’s current written disclosure brochure which discusses, among other things, the firm’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. Investments in securities involve risk, including the possible loss of principal. The information on this website is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.