Bonds Have Been Awful. It’s a Good Time to Buy. (2024)

FAQs

Is it a good or bad time to buy bonds? ›

Short-term bond yields are high currently, but with the Federal Reserve poised to cut interest rates investors may want to consider longer-term bonds or bond funds. High-quality bond investments remain attractive.

Many yield curve pairs using various maturities have been inverted since late 2022. This is due in large part to the Fed's rate hikes, which have the greatest direct impact on short-term bond yields. Source: U.S. Bank Asset Management Group, U.S. Department of the Treasury, as of May 3, 2024.

Inflation risk - With relatively low yields, income produced by Treasuries may be lower than the rate of inflation. Credit or default risk - Investors need to be aware that all bonds have the risk of default.

Heading into 2024, bond investors were sitting pretty. Yields were near their highest levels in decades, offering attractive income. Meanwhile, the potential for a slowing economy and expectations for upwards of five interest rate cuts by the Fed offered potential profit from rising bond prices.

Traditionally, the answer has been that bonds provide diversification and income. They zig when stocks zag, providing income for spending needs. In finance terms, bonds have “low correlation” levels to stocks, and adding them to a portfolio would help to reduce the overall portfolio risk.

At an initial rate of 4.28%, buying an I bond today gets roughly 1% less compared to the 5.25% 12-month Treasury Bill rate (May 1, 2024). You could say that buying an I Bond right now is a 'fair deal' historically compared to 2021 & 2022 when I Bond rates were much higher than comparable interest rate products.

Bond prices decline when interest rates rise, when the issuer experiences a negative credit event, or as market liquidity dries up. Inflation can also erode the returns on bonds, as well as taxes or regulatory changes.

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.

Bonds pay a fixed rate of interest over time, and so cannot keep up with inflation. A constant is incapable of keeping pace with an increasing variable. At a minimum, you need your money to appreciate more than the rate of inflation, and a fixed-income portfolio simply cannot do that for you. Don't buy bonds.

Is there a better investment than bonds? ›

Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns. By owning a mix of different investments, you're diversifying your portfolio.

After bonds are initially issued, their worth will fluctuate like a stock's would. If you're holding the bond to maturity, the fluctuations won't matter—your interest payments and face value won't change.

Unless you are set on holding your bonds until maturity despite the upcoming availability of more lucrative options, a looming interest rate hike should be a clear sell signal.

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."

Bond market strategists and fund managers generally agree that yields are still attractive, especially relative to inflation, and will likely stay higher than before the pandemic.

With interest rates as high as they've been for 16 years, but with many experts predicting they may fall in the coming months, it could be a good time to take advantage of fixed-rate bonds.

5 years: While you technically can cash it in at that 12-month marker, it's better to avoid doing so – and to keep that bond intact for at least 4 more years. Why? Because you'll have to forfeit 3 months of interest if you cash it in within the first 5 years.