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It’s the Worst Bond Market Since 1842. That’s Good News.


So far in 2022, with inflation raging, bonds have lose 10%—Expect the worst profits in US history. On Wednesday, the Federal Reserve interest rate hike increased by 0.5 percentage points, the strongest increase in 22 years.

However, when your body begins to heal from an injury before you can feel any improvement, the worst for bond investors may be over. Bond dumping may now have made the mistake of selling low after buying high.

Let’s start by putting pain in historical perspective.

The U.S. bond market has had positive returns, pre-inflation, for all but four of the years since 1976. Even 1994when the Federal Reserve raised interest rates six times by a total of 2.5 percentage points, bonds lost only 3% in total.

Almost never has the US bond market lost as much money as it did in the first four months of 2022 Edward McQuarriean emeritus professor of business at Santa Clara University, who studies property returns over the centuries.

Mr. McQuarrie said long-term Treasuries had lost more than 18 percent this year through April 30. That beat the previous record, which lost 17 percent in the 12 months ending March 1980. So far, he said, the broad bond market has performed worse in 2022 than in any year since 1792 except for one. It was all the way back to 1842, when a deep depression approached the rocky bottom.

Bryan Taylor, chief economist at Global Financial Data, a research firm in San Juan Capistrano, Calif., said:

Inflation is like kryptonite to bonds, whose interest payments are fixed and therefore cannot grow to keep up with rising costs of living. Until recently, inflation seemed like an issue of the distant past, when it often baffled bond investors.

For most of the four decades since 1981interest rates have fallen and bond prices have risen, creating a capital income breeze for fixed-income investors. Not only do you earn interest on your bonds, but you also pocket extra profits as they increase in value.

Over some long time periods, such as the 20 years ending March 2020, bonds yielded even higher returns than stocks without any significant losses.

Those glorious years are gone.

“I think the protracted downtrend is finally over,” Mr. Taylor said. “People have been wrong about the direction of rates for 40 years, but I have to think at this point they might be right in the end.”

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The prospect of losing money when interest rates rise seems to be making many people nervous. After pouring $592 billion into a bond fund last year, investors have raked in $104 billion so far in 2022. according to the Institute of Corporate Investment.

But rising rates aren’t a bad thing for bond investors — as long as inflation is kept under control.

Make no mistake: Investing in bonds is an act of believing that the Fed can tame inflation. And that, as the United States Secretary of the Treasury Janet Yellen said“It will require skill and luck.”

However, if the Fed keeps inflation in check, bond investors should be fine – and should do better over time as they reinvest their earnings instead of treating it like cash.

In the long run, the total return of bonds depends more on their earnings than on changes in price. According to Loomis, Sayles & Co., an investment manager in Boston, since 1976, just over 90% of the average annual return in the US bond market has come from interest and reinvestment.

Thanks to the recent price drop, the yield in the US aggregated bond market, at around 3.6%, has doubled since Dec.

People are always chasing the past with their money. Investors added more than $445 billion to bond funds in 2020, largely because of strong past returns. But by the end of that year, yields in the US bond market had fallen to just over 1% – meaning future returns were bound to be weak.

Investors then went overboard. Perhaps now they are too pessimistic.

The only best predictor the future yield on bonds, before inflation, is their yield to maturity. As prices fall, yields rise, so the recent tendency to buy bonds has increased their expected returns.

Lauren Wagandt, co-manager of

T. Rowe Price Corporate Income Fund. “And we’re starting to see some value emerge.”

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Yields on corporate bond indexes are hitting their highest levels in at least 11 years, she said.

The recent rise in yields also means that shorter-term US Treasuries are likely to be a more effective buffer against future declines in equities.

If your recent losses make you feel like buying bonds again, remember why you own them. Bonds are not meant to make you rich; they keep you from becoming poor while paying you some income along the way.

“It’s important not to get too emotional about the recent gains we’ve seen,” Ms. Wagandt said. “There’s more income now and more value.”

Write letter for Jason Zweig at [email protected]

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