Are Bonds the New Stock Market?

It’s not your parent’s bond market.

Long gone are the days when you invested in a government bond and received a sheet of coupons you cut out every 6 months to claim the interest at your local bank.  The US Government issued bonds to finance debt going all the way back to the birth of our nation. They were essentially IOUs issued by the Continental Congress to raise money for fighting the British in the Revolutionary War.  Today they are used to finance the general operations of the U.S. Government, but they also trade like stocks. Until 2022, bonds rarely lost money and when they did, stock prices usually went up. 2022 marked a historic year for bonds when they entered into a simultaneous correction with the stock market. As a result, many financial advisors have included alternative investments in portfolios to reduce stock and bond market risk. No, it is not your parent’s bond market anymore.

A new bond market

Since 1976, there have only been 5 years where the US bond market recorded losses, with 2022 being the worst. According to the Wall Street Journal, the previous losses occurred in 1994, 1999, 2013, and 2021 and were small in comparison to the record drop of 13% in bond prices in 2022. The small and infrequent losses in bonds have made them a favorite of widows and orphans, or at least that is what people say.  Investors use bonds to diversify the risk of the stock market. That didn’t work in 2022 – one of only 4 years when we experienced a simultaneous correction of stocks and bonds. People can always choose to eliminate stock market risk by not investing in the market. Bonds on the other hand impact us all in one way or another.

How can bonds impact me if I don’t invest in them?

You may have heard that bonds prices and yields have an inverse relationship. In plain English, this means when bond prices go down interest rates usually go up. There may be other factors, but that is how it usually works. Most of us are impacted by the bond market whether we realize it or not. As a first-time home buyer, it tells us what type of home we can afford since a larger part of our payment goes to interest.  It also impacts us if we are selling a home since it may be too difficult to find a buyer who can afford higher interest rates. Of course, it impacts credit card interest. You may not borrow money, but your grocer probably does and if they have to pay more in interest, they will likely pass it on for you. So as you see, there are many ways bond prices impact us. So what can we do? Save more, borrow less, and review the allocation in your investment portfolio.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal. No strategy assures success or protects against loss. Please visit our website for more information and useful tools.

LPL Tracking 512613

© 2024 Investment Planning Group. All Rights Reserved.