The Worst Quarter For Bonds In Decades

Bonds, a typically safe and less volatile asset when compared to stocks, had their worst-performing quarter in decades. In fact, as of this writing in the first week of April, bonds are down nearly 8% from their highs.

Some bonds are down even more, such as long-term government bonds, which are down over 11%. This was particularly unusual because stocks also sold off, and investors often buy bonds for safety when stocks go down. That did not happen for several reasons but the biggest was, you guessed it, inflation. Here’s how inflation led to low bond returns -

1 - When inflation is high the federal reserve raises interest rates.

2 – They raise interest rates because it makes it more expensive for consumers and businesses to borrow and spend money.

3 – When fewer consumers and businesses can buy, prices come down to meet the lower demand. This is how higher prices (inflation) are curbed by federal reserve policy.

When it is expected that the federal reserve will raise interest rates, current bonds with lower interest rates go down in value. A bond paying 2% should be less valuable than a new bond that gets issued at 2.5%.

So, should you get out bonds entirely? Not necessarily. Bonds have already priced in the federal reserve raising interest rates quite a bit in reaction to higher than expected inflation so the worst could be behind us. Of course, there could be more surprises in store but that is always the case when investing. If you are concerned about rates continuing to rise, a simple strategy could be to own shorter-term bonds. While they won’t pay as much as long-term bonds, you get your money back sooner and be able to reinvest at the higher rates as they creep up.

Thank you for reading,

Alex

This blog post is not advice. Please read disclaimers.