2022 was the worst-ever year for U.S. bonds. How to position your portfolio for 2023 (2023)

Traders at the New York Stock Exchange on Dec. 21, 2022.

Michael M. Santiago | Getty Images News | Getty Images

The bond market suffered a significant meltdown in 2022.

Bonds are generally thought to be the boring, relatively safe part of an investment portfolio. They've historically been a shock absorber, helping buoy portfolios when stocks plunge. But that relationship broke down last year, and bonds were anything but boring.

In fact, it was the worst-ever year on record for U.S. bond investors, according to an analysis by Edward McQuarrie, a professor emeritus at Santa Clara University who studies historical investment returns.

The implosion is largely a function of the U.S. Federal Reserve aggressively raising interest rates to fight inflation, which peaked in June at its highest rate since the early 1980s and arose from an amalgam of pandemic-era shocks.

Inflation is, in short, "kryptonite" for bonds, McQuarrie said.

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"Even if you go back 250 years, you can't find a worse year than 2022," he said of the U.S. bond market.

That analysis centers on "safe" bonds such as U.S. Treasurys and investment-grade corporate bonds, he said, and holds true for both "nominal" and "real" returns, i.e., returns before and after accounting for inflation.

Let's look at the Total Bond Index as an example. The index tracks U.S. investment-grade bonds, which refers to corporate and government debt that credit-rating agencies deem to have a low risk of default.

The index lost more than 13% in 2022. Before then, the index had suffered its worst 12-month return in March 1980, when it lost 9.2% in nominal terms, McQuarrie said.

That index dates to 1972. We can look further back using different bond barometers. Due to bond dynamics, returns deteriorate more for those with the longest time horizon, or maturity.

2022 was the worst-ever year for U.S. bonds. How to position your portfolio for 2023 (1)

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Here's why some fund managers expect a bond resurgence

Squawk on the Street

For example, intermediate-term Treasury bonds lost 10.6% in 2022, the biggest decline on record for Treasurys dating to at least 1926, before which monthly Treasury data is a bit spotty, McQuarrie said.

The longest U.S. government bonds have a maturity of 30 years. Such long-dated U.S. notes lost 39.2% in 2022, as measured by an index tracking long-term zero-coupon bonds.

That's a record low dating to 1754, McQuarrie said. You'd have to go all the way back to the Napoleonic War era for the second-worst showing, when long bonds lost 19% in 1803. McQuarrie said the analysis uses bonds issued by Great Britain as a barometer before 1918, when they were arguably safer than those issued by the U.S.

"What happened last year in the bond market was seismic," said Charlie Fitzgerald III, an Orlando, Florida-based certified financial planner. "We knew this kind of thing could happen."

"But to actually see it play out was really rough."

Why bonds broke down in 2022

It's impossible to know what's in store for 2023 — but many financial advisors and investment experts think it's unlikely bonds will do nearly as poorly.

While returns won't necessarily flip positive, bonds will likely reclaim their place as a portfolio stabilizer and diversifier relative to stocks, advisors said.

"We're more likely to have bonds behave like bonds and stocks behave like stocks: If stocks go down, they may move very, very little," said Philip Chao, chief investment officer at Experiential Wealth, based in Cabin John, Maryland.

Interest rates started 2022 at rock-bottom — where they'd been for the better part of the time since the Great Recession.

The U.S. Federal Reserve slashed borrowing costs to near zero again at the beginning of the pandemic to help prop up the economy.

But the central bank reversed course starting in March. The Fed raised its benchmark interest rate seven times last year, hoisting it to 4.25% to 4.5% in what were its most aggressive policy moves since the early 1980s.

This was hugely consequential for bonds.

Bond prices move opposite interest rates — as interest rates rise, bond prices fall. In basic terms, that's because the value of a bond you hold now will fall as new bonds are issued at higher interest rates. Those new bonds deliver bigger interest payments courtesy of their higher yield, making existing bonds less valuable — thereby reducing the price your current bond commands and dampening investment returns.

Further, bond yields in the latter half of 2022 were among their lowest in at least 150 years — meaning bonds were at their most expensive in historical terms, said John Rekenthaler, vice president of research at Morningstar.

Bond fund managers who had bought pricey bonds ultimately sold low when inflation began to surface, he said.

"A more dangerous combination for bond prices can scarcely be imagined," Rekenthaler wrote.

Why long-term bonds got hit hardest

Bonds with longer maturity dates got especially clobbered. Think of the maturity date as a bond's term or holding period.

Bond funds holding longer-dated notes generally have a longer "duration." Duration is a measure of a bond's sensitivity to interest rates and is impacted by maturity, among other factors.

Here's a simple formula to demonstrate how it works. Let's say an intermediate-term bond fund has a duration of five years. In this case, we'd expect bond prices to fall by 5 percentage points for every 1-point increase in interest rates. The anticipated decline would be 10 points for a fund with a 10-year duration, 15 points for a fund with a 15-year duration, and so on.

We can see why long-dated bonds suffered especially big losses in 2022, given interest rates jumped by about 4 percentage points.

2023 is shaping up to be better for bonds

The dynamic appears to be different this year, though.

The Federal Reserve is poised to continue raising interest rates, but the increase is unlikely to be as dramatic or rapid — in which case the impact on bonds would be more muted, advisors said.

"There's no way in God's green earth the Fed will have as many rate hikes as fast and as high as 2022," said Lee Baker, an Atlanta-based CFP and president of Apex Financial Services. "When you go from 0% to 4%, that's crushing."

This year is a whole new scenario.

Cathy Curtis

founder of Curtis Financial Planning

"We won't go to 8%," he added. "There's just no way."

In December, Fed officials projected they'd raise rates as high as 5.1% in 2023. That forecast could change. But it seems most of the losses in fixed income are behind us, Chao said.

Plus, bonds and other types of "fixed income" are entering the year delivering much stronger returns for investors than they did in 2021.

"This year is a whole new scenario," said CFP Cathy Curtis, founder of Curtis Financial Planning, based in Oakland, California.

Here's what to know about bond portfolios

Amid the big picture for 2023, don't abandon bonds given their performance last year, Fitzgerald said. They still have an important role in a diversified portfolio, he added.

The traditional dynamics of a 60/40 portfolio — a portfolio barometer for investors, weighted 60% to stocks and 40% to bonds — will likely return, advisors said. In other words, bonds will likely again serve as ballast when stocks fall, they said.

Over the past decade or so, low bond yields have led many investors to raise their stock allocations to achieve their target portfolio returns — perhaps to an overall stock-bond allocation of 70/30 versus 60/40, Baker said.

In 2023, it may make sense to dial back stock exposure into the 60/40 range again — which, given higher bond yields, could achieve the same target returns but with a reduced investment risk, Baker added.

Given that the scope of future interest-rate movements remains unclear, some advisors recommend holding more short- and intermediate-term bonds, which have less interest-rate risk than longer ones. The extent to which investors do so depends on their timeline for their funds.

Jayk7 | Moment | Getty Images

For example, an investor saving to buy a house in the next year might park some money in a certificate of deposit or U.S. Treasury bond with a six-, nine- or 12-month term. High-yield online savings accounts or money market accounts are also good options, advisors said.

Cash alternatives are generally paying about 3% to 5% right now, Curtis said.

"I can put clients' cash allocation to work to get decent returns safely," she said.

Going forward, it's not as prudent to be overweight to short-term bonds, though, Curtis said. It's a good time to start investment positions in more typical bond portfolios with an intermediate-term duration, of, say, six to eight years rather than one to five years, given that inflation and rate hikes seem to be easing.

The average investor can consider a total bond fund like the iShares Core U.S. Aggregate Bond fund (AGG), for example, Curtis said. The fund had a duration of 6.35 years as of Jan. 4. Investors in high tax brackets should buy a total bond fund in a retirement account instead of a taxable account, Curtis added.


Is 2023 a good time to invest in bonds? ›

Key Takeaways. The Federal Reserve's ongoing fight against inflation could result in a soft landing in 2023. Mortgage-backed securities, high-yield bonds and emerging-markets debt could benefit in this environment.

What will the bond market do in 2023? ›

The Outlook for Bonds in 2023

One factor in bonds' favor is that bond yields are now at a level that can help retirees seeking income support a 4% retirement withdrawal rate. Beyond this, both individual bonds and bond funds could benefit if interest rates stabilize or decline.

Are bonds a bad investment in 2022? ›

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?

What are the best bonds to buy in 2023? ›

9 of the Best Bond ETFs to Buy in 2023
Bond ETFExpense ratio30-Day SEC Yield
US Treasury 2 Year Note ETF (UTWO)0.15%4.1%
iShares U.S. Treasury Bond ETF (GOVT)0.05%4%
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)0.14%5.2%
SPDR Bloomberg High Yield Bond ETF (JNK)0.4%8.4%
5 more rows

Will I bonds go up in May 2023? ›

May 1, 2023. Series EE savings bonds issued May 2023 through October 2023 will earn an annual fixed rate of 2.50% and Series I savings bonds will earn a composite rate of 4.30%, a portion of which is indexed to inflation every six months. The EE bond fixed rate applies to a bond's 20-year original maturity.

Where should I invest my money in 2023? ›

Recap of the 10 best investments in 2023
  • High-yield savings accounts.
  • Short-term certificates of deposit.
  • Series I bonds.
  • Short-term corporate bond funds.
  • Dividend stock funds.
  • Value stock funds.
  • REIT funds.
  • S&P 500 index funds.
May 1, 2023

Will bond funds rebound in 2023? ›

The Bloomberg Global Aggregate bond index rose 3.7% in 2023 through Thursday after a 16% decline last year. The S&P U.S. Aggregate Bond Index fell 12% in 2022 and is up 3.1% since.

What is the outlook for investment grade bonds in 2023? ›

With yields high and the pace and scale of global interest rate rises now expected to moderate, investment grade bonds could outperform in 2023, according to Euan McNeil, bond manager at Aegon Asset Management.

What is the bond yield prediction for 2023? ›

The United States 10 Years Government Bond Yield is expected to be 4.036% by the end of September 2023.

Will bonds go up if stock market crashes? ›

And in a recession, you know, when the stock market is usually crashing, the Fed will be anxiously cutting interest rates to boost the economy, you know, to stem that crash. So in this situation, bond prices would tend to go up.

Will bonds go down if the market crashes? ›

The short answer is bonds tend to be less volatile than stocks and often perform better during recessions than other financial assets. However, they also come with their own set of risks, including default risk and interest rate risk.

Will bonds go up if the market crashes? ›

When the bond market crashes, bond prices plummet quickly, just as stock prices fall dramatically during a stock market crash. Bond market crashes are often triggered by rising interest rates. Bonds are loans from investors to the bond issuer in exchange for interest earned.

What is the safest investment in 2023? ›

Here are the best low-risk investments in June 2023:
  • High-yield savings accounts.
  • Series I savings bonds.
  • Short-term certificates of deposit.
  • Money market funds.
  • Treasury bills, notes, bonds and TIPS.
  • Corporate bonds.
  • Dividend-paying stocks.
  • Preferred stocks.
Jun 1, 2023

Should retirees invest in bonds? ›

Robust Tax Benefits for Retirees

I bonds are a great idea for retirees and other investors looking for competitive inflation-adjusted returns. “They offer such a great deal that the government limits the annual purchase amount to $10,000 per Social Security number,” Reilly notes. “There are no coupon payments.

Should you buy bonds when interest rates are high? ›

If your objective is to increase total return and "you have some flexibility in either how much you invest or when you can invest, it's better to buy bonds when interest rates are high and peaking." But for long-term bond fund investors, "rising interest rates can actually be a tailwind," Barrickman says.

Can I buy $10000 worth of I bonds every year? ›

While there's no limit on how often you can buy I bonds, there is a limit on how much a given Social Security number can purchase annually. Here are the annual limits: Up to $10,000 in I bonds annually online. Up to $5,000 in paper I bonds with money from a tax refund.

Should I buy I bonds now or in May? ›

Waiting until May or June would cause you to lose out on the high rates that you can get through April 27. Buying an I Bond before April 27 means you could end up with an annualized rate of around 5.34% for the first 12 months. With compounding it would inch up, closer to 5.39%.

Will interest keep going up in 2023? ›

So far in 2023, the Fed raised rates 0.25 percentage points twice. If they hike rates at the May meeting, it is likely to be another 0.25% jump, meaning interest rates will have increased by 0.75% in 2023, up to 5.25%.

Where to invest $25,000 in 2023? ›

What are the best types of investments of 2023?
  • High Yield Savings Accounts. ...
  • Short-Term Certificates of Deposits. ...
  • Short-Term Government Bonds Funds. ...
  • S&P 500 Index Funds. ...
  • Dividend Stock Funds. ...
  • Real Estate & REITs. ...
  • Cryptocurrency.

Should I move my investments to cash 2023? ›

The answer is no, according to advisors and investment analysts. "Allocating more funds to high-yielding CDs, money market funds, or treasuries may seem prudent; however, this is a form of market timing and should be avoided," explained Jonathan Shenkman of Shenkman Wealth Management.

What will 2023 look like financially? ›

For 2023 as a whole, real GDP (that is, GDP adjusted to remove the effects of inflation) is projected to grow by just 0.1 percent. The growth of real GDP is projected to speed up thereafter, averaging 2.4 percent a year from 2024 to 2027, in response to declines in interest rates.

Has the bond market bottomed? ›

Global bond markets have suffered unprecedented losses in 2022, with the Bloomberg Global Aggregate Bond index (unhedged) down almost 15% from its high in January 2021. To put this into context, global fixed income investors have not endured a rout like this since official data began in 1990.

Should I be selling my bond funds now? ›

Unless there is a change in your circumstances, we believe investors should continue to hold onto their bonds for the following reasons: The bonds will mature at par value, meaning you will receive the face value of the bond at maturity, so present-day dips in value are only temporary.

Will investments go back up in 2023? ›

There will be economic slowdowns, potential recessions, squeezed corporate margins and rising unemployment globally. However, as the year progresses, reasons for optimism are likely to emerge and 2023 should be much more positive for investors than 2022. Stock markets are forward-looking – investors look ahead.

How high will interest rates go by the end of 2023? ›

Though Fed policymakers skipped an 11th successive increase to the federal funds rate —the borrowing rate for commercial banks and credit unions—at their June meeting , officials revised the 2023 peak rate projection up to 5.6% from the 5.1% target projected in March.

What will bond yield be in 2024? ›

United States Treasury Note 2.5% May 15, 2024 Bond Yield - Investing.com.

How high will the 10-year treasury go in 2023? ›

The First-Quarter Market Mavens survey found that market analysts expect the 10-year Treasury yield to climb to 3.7 percent a year from now, up from 3.38 percent at the end of the survey period on March 24, 2023.

Is it better to invest in stocks or bonds right now? ›

They provide steady, reliable income and have relatively low levels of risk. If you have more time to reach your goals, investing in the stock market is likely a better option than bonds. By investing in stocks, you have more potential for growth, and you can weather market fluctuations.

Where to invest when stocks and bonds are crashing? ›

Short-term investments are typically considered to be less risky than long-term investments. Some safe short-term investment options include cash, CDs, and government bonds. These investments tend to have low returns but are less likely to lose value than stocks or other volatile assets.

Should I move investments to bonds? ›

The Bottom Line. Moving 401(k) assets into bonds could make sense if you're closer to retirement age or you're generally a more conservative investor overall. But doing so could potentially cost you growth in your portfolio over time.

What bonds are good during a recession? ›

Federal bonds or US Treasury bonds are issued by the Federal Reserve System (made up of the central bank and monetary authority of the United States.) Investors favor Treasury bonds during a recession because they're considered to be a safe investment.

Why are bonds doing so poorly? ›

The Federal Reserve raised rates more than they have in 40 years. That caused massive losses inside of bonds,” says Robert Gilliland, managing director at Concenture Wealth Management. “It's important to understand that bonds are generally secure, but not necessarily safe.”

Will the bond market bounce back? ›

It has been a long time coming, but 2023 looks to be the year that bonds will be back in fashion with investors. After years of low yields followed by a brutal drop in prices during 2022, returns in the fixed income markets appear poised to rebound.

Are bonds riskier than stocks right now? ›

U.S. Treasury bonds are generally more stable than stocks in the short term, but this lower risk typically translates to lower returns, as noted above. Treasury securities, such as government bonds and bills, are virtually risk-free, as these instruments are backed by the U.S. government.

Do bonds go down from inflation? ›

Bond prices are inversely rated to interest rates. Inflation causes interest rates to rise, leading to a decrease in value of existing bonds. During times of high inflation, bonds yielding fixed interest rates tend to be less attractive.

What happens to stocks when bond prices fall? ›

Bonds affect the stock market because when bonds go down, stock prices tend to go up. The opposite also happens: when bond prices go up, stock prices tend to go down. Bonds compete with stocks for investors' dollars because bonds are often considered safer than stocks.

How to manage your money in 2023? ›

And this list of 12 things to do differently with your money in 2023 can help.
  1. Get on a budget. ...
  2. Budget for inflation. ...
  3. Don't wait on student loan forgiveness. ...
  4. Pay off your debt! ...
  5. Beware of buy now, pay later. ...
  6. Pay attention to your online spending habits. ...
  7. Make sure your emergency fund is fully funded. ...
  8. Don't stop investing.
Feb 2, 2023

What is the safest investment of all time? ›

What are the safest types of investments? U.S. Treasury securities, money market mutual funds and high-yield savings accounts are considered by most experts to be the safest types of investments available.

How can we protect money in 2023? ›

5 ways to inflation-proof your finances in 2023, according to...
  1. Analyze and adjust your spending and saving.
  2. Lock in today's higher rates.
  3. Diversify your portfolio.
  4. Build an emergency fund and invest the rest.
  5. Rethink your borrowing.
May 23, 2023

What should a 70 year old retiree asset allocation be? ›

At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).

When to buy I bonds in 2023? ›

Since you can get the same 0.90% fixed rate on your I Bond purchase in June 2023 through October 2023 it's likely best to wait until October 2023 so that you can get a better sense of what your future renewal rates will be, as well as what rates you can get on similar interest rate investments.

What is the downside to bonds? ›

Some of the disadvantages of bonds include interest rate fluctuations, market volatility, lower returns, and change in the issuer's financial stability. The price of bonds is inversely proportional to the interest rate. If bond prices increase, interest rates decrease and vice-versa.

What to buy when interest rates rise? ›

The types of investments that tend to do well as rates rise include:
  • Banks and other financial institutions. As rates rise, banks can charge higher rates for their loans, while moving up the price they pay for deposits at a slower pace. ...
  • Value stocks. ...
  • Dividend stocks. ...
  • The S&P 500 index. ...
  • Short-term government bonds.
Apr 24, 2023

Will stocks or bonds do better in 2023? ›

Both stocks and bonds are performing better than they did last year, but in 2023 the stock market has further to fall as it continues to resist the growing concerns around a recession. The best tactic is to diversify your portfolio so you're not overly reliant on one or the other doing well.

What will the interest rate be on I bonds in 2023? ›

The composite rate for I bonds issued from May 2023 through October 2023 is 4.30%.

Is it worth investing in 2023? ›

2023 is a great time to start investing. But so was 2022. The key point is that over the long term, investments generally do grow in value, even if there is some early volatility. It is far better to invest now, whenever now happens to be, rather than waiting for some ideal future opportunity.

How far will stocks fall in 2023? ›

Publicly traded companies continue to see a slide in revenues in the second quarter of 2023. The larger question is how long it will take for earnings to recover. FactSet Research Systems estimates that S&P 500 second-quarter earnings will decline by 6.3%, and revenue will fall by 0.4%.

What stock will go up the most in 2023? ›

Bank of America's Best Growth Stocks of 2023
CompanyForward Sales Growth Next Year
Match (MTCH)+11.6%
Progressive (PGR)+13.0%
SolarEdge Technologies (SEDG)+22.3%
T-Mobile (TMUS)+3.5%
6 more rows
Jun 1, 2023

Are bonds a good investment during a recession? ›

Bonds and cash have historically outperformed most stocks during recessions. Selling stocks in favor of bonds and cash before a recession may leave you unprepared if stocks bounce back before the economy does, which has happened historically during many recessions.

Will interest go up in 2023? ›

When it becomes more attractive to save money, consumers tend to spend less of it. But the Fed isn't done fighting inflation. And because of that, consumers should not expect interest rates to drop in 2023. However, rates may also not climb much from where they are today.

Will 2023 be a bad year for the stock market? ›

10% Return for S&P 500 a Real Possibility by End of 2023

Short of a recession — a very real possibility — consensus estimates are for about 5% earnings growth for S&P 500 companies in 2023. That's certainly less than what it was in years past, but still respectable.

What is the market prediction for 2023? ›

Currently, the consensus estimate is for an 8% contraction in the growth rate, followed by a 6% contraction in the second quarter. For calendar-year 2023, the consensus earnings estimate is for a 2% contraction. But that estimate is still coming down, and based on historical patterns, could continue to do so.

What to expect financially in 2023? ›

In an environment of slow growth, lower inflation and new monetary policies, expect 2023 to have upside for bonds, defensive stocks and emerging markets. We forecast a marked slowdown in global economic growth in 2023: 1.2% from 3.7% in 2022.


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