Can bond funds lose value?
Key Takeaways. Bonds are often touted as less risky than stocks—and for the most part, they are—but that does not mean you cannot lose money owning bonds. Bond prices decline when interest rates rise, when the issuer experiences a negative credit event, or as market liquidity dries up.
As for fixed income, we expect a strong bounce-back year to play out over the course of 2024. When bond yields are high, the income earned is often enough to offset most price fluctuations. In fact, for the 10-year Treasury to deliver a negative return in 2024, the yield would have to rise to 5.3 percent.
The downside to owning bond funds is: The management fee: Management fees for the more actively traded bond funds can be higher, which may lead to lower returns.
High-quality bond investments remain attractive. With yields on investment-grade-rated1 bonds still near 15-year highs,2 we believe investors should continue to consider intermediate- and longer-term bonds to lock in those high yields.
Bonds are generally considered a less-risky complement to the volatility of stocks in an investment portfolio. U.S. Treasurys, and specifically Treasury bills and Treasury notes, are the benchmark for a nearly risk-free investment if held to maturity.
If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond's price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates.
Bond prices have an inverse relationship with interest rates. This means that when interest rates go up, bond prices go down and when interest rates go down, bond prices go up.
It's all about the Fed
Because bond prices typically fall when interest rates rise, bond markets have long been sensitive to changes in rates by central banks. But they are also influenced by other factors such as the health of the economy and that of the companies and governments that issue bonds.
Key central bank rates and bond yields remain high globally and are likely to remain elevated well into 2024 before retreating. Further, the chance of higher policy rates from here is slim; the potential for rates to decline is much higher.
We expect bond yields to decline in line with falling inflation and slower economic growth, but uncertainty about the Federal Reserve's policy moves will likely be a source of volatility. Nonetheless, we are optimistic that fixed income will deliver positive returns in 2024.
What is the safest type of bond fund?
Treasuries are generally considered"risk-free" since the federal government guarantees them and has never (yet) defaulted. These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods. They offer high liquidity due to an active secondary market.
2 When the market consensus is that a rate increase is right around the corner, it's time to go to market. 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.
Holding bonds vs. trading bonds
However, you can also buy and sell bonds on the secondary market. 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.
Most bonds and interest rates have an inverse relationship. When rates go up, bond prices typically go down, and when interest rates decline, bond prices typically rise.
| Best Ultrashort Bond Index Funds | Ticker | Benchmark |
|---|---|---|
| Vanguard Ultra-ST Bond Admiral | VUSFX | Bloomberg US Aggregate |
| Goldman Sachs Access Treasury 0-1 Yr ETF | GBIL | FTSE US Treasury 0-1 Year Composite |
| SPDR Bloomberg 1-3 Month T-Bill ETF | BIL | Bloomberg US Treasury Bill 1-3 Month |
| iShares Short Treasury Bond ETF | SHV | ICE US Treasury 4PM |
In a recession, investors often turn to bonds, particularly government bonds, as safer investments. The shift from stocks to bonds can increase bond prices, reduce portfolio volatility, and provide a predictable income. However, drawbacks include lower yield potential, default risks, and interest rate risks.
Even if the stock market crashes, you aren't likely to see your bond investments take large hits. However, businesses that have been hard hit by the crash may have a difficult time repaying their bonds.
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
What's driving the most recent bond sell-off? A big reason is that economic data has been stronger than forecast. Although a stronger economy is good news generally, the Fed right now needs a cooler economy to bring down inflation.
| Rank | Fund | Yield |
|---|---|---|
| 1 | Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) | 6.40% |
| 2 | T. Rowe Price High Yield Fund (PRHYX) | 7.02% |
| 3 | PGIM High Yield Fund Class A (PBHAX) | 7.22% |
| 4 | Fidelity Capital & Income Fund (fa*gIX) | 6.16% |
Should I invest in bonds or CDs?
CDs are an excellent place to park your cash and earn interest on your balance. Although there's a risk of inflation outpacing CD interest rates, they are virtually guaranteed earnings. Bonds, on the other hand, may deliver higher returns and regular income via interest payments.
The answer is both yes and no, depending on why you're investing. Investing in bonds when interest rates have peaked can yield higher returns. However, rising interest rates reward bond investors who reinvest their principal over time. It's hard to time the bond market.
Investors' 10 year expected return stood at 7.2% in December 2023, slightly above the reading of 7.0% in October 2023. A second line shows the average stock market return that investors expect over the coming 12 months. The data are shown on an every-other-month basis from February 2017 through December 2023.
The S&P 500 generated an impressive 26.29% total return in 2023, rebounding from an 18.11% setback in 2022. Heading into 2024, investors are optimistic the same macroeconomic tailwinds that fueled the stock market's 2023 rally will propel the S&P 500 to new all-time highs in 2024.
Someone who invested £100 in global bonds in May 2021 saw the value of this investment fall to around £90 by the end of November 2023. However, based on our current forecast of annualised returns of around 5% over the next 10 years, the investment would be back at £100 by early 2026 (shown by the gold line).
