Bonds, haven for elderly and cautious, are getting torched

May 12, 2022, 6:30 AM | Updated: 7:52 am
FILE - A television screen on the floor of the New York Stock Exchange, Wednesday, March 16, 2022, ...

FILE - A television screen on the floor of the New York Stock Exchange, Wednesday, March 16, 2022, shows the Federal Reserve's decision to raise interest rates. The Fed’s main weapon to bring down inflation is raising interest rates. But this causes newly issued bonds to pay higher yields, making older bonds sitting in investors’ portfolios suddenly look less valuable than before. (AP Photo/Richard Drew, File)

(AP Photo/Richard Drew, File)

NEW YORK (AP) — Bonds are supposed to be the safe part of any nest egg, but they’re getting brutalized.

High-quality U.S. bonds have lost more than 10% so far this year, as of Monday, on pace for one of their worst years in history. The investors feeling it the most are the very ones who invest conservatively, favoring bonds instead of stocks in hopes of securing historically steady returns.

To put the misery in context: This year’s loss so far is more than three times as big as the worst year on records going back to 1976. The previous worst performance was a 2.9% loss in 1994, according to a widely followed index that measures investment-grade bonds.

So not only is losing money on bonds a surprise for many investors, the amount of this year’s carnage is also a shock.

“There’s kind of this false perception of: Bonds are bulletproof and can’t lose money,” said Matthew Benson, owner of Sonmore Financial in Chandler, Arizona.

This year’s losses for bonds are a result of high inflation sweeping the world and the Federal Reserve’s response to it. Inflation in general is anathema to bond investors because it weakens the buying power of the fixed payments bonds will make in the future.

The Fed’s main weapon to bring down inflation is raising interest rates. But this causes newly issued bonds to pay higher yields, making older bonds sitting in investors’ portfolios suddenly look less valuable than before. That in turn makes prices fall for those older bonds.

Any investor who bought a bond and simply holds on until it matures will still get the full value of their principal back, along with all promised interest payments, assuming no defaults. But they’d be making more if they had that same principal money invested in a newer, higher-yielding bond.

“It is a challenge and it is a problem, and it’s something we’re reviewing with our clients,” said Charles Sachs, chief investment officer at Kaufman Rossin Wealth. “The optics aren’t good. The bond gets priced every day, and if it matures in two years or three years, you will get paid out, but nobody wants to see losses along the way.”

Bond prices have often fallen in the past, including as recently as 2018. But even then, bonds usually paid enough interest to make up for their price drop. In 2018, for example, prices for high-quality bonds fell 2.9%. But after counting the income they paid, investors eked out a positive total return of 0.01%.

Coming into 2022, though, bonds were paying little. The 10-year Treasury’s yield was at 1.51%, for example, versus its average of 2.94% over the last 20 years. That gave investors less cushion for drops in price.

Some financial advisers are responding by shepherding their wealthier clients into complex, alternative products like private mortgages or funds that use hedge fund-like strategies.

Many professional investors and advisers say investors nevertheless shouldn’t give up on bonds, even with their losses, because they remain a better bet than stocks to fill the role of ballast in a portfolio. An old rule of thumb says a portfolio should be 60% invested in stocks and 40% in bonds, with the stock portion ramping up or down depending on an investor’s willingness to take risk.

Bonds have held up better this year than the stock market, with the S&P 500 down 16.3% for 2022 through Monday.

“Nobody put bonds in their portfolio because they thought it would be the best performer,” Benson said. “You’re not going to get the same 4% to 7% total return out of a bond fund that maybe you would have over the last 25 to 30 years. But the reason somebody moved to bonds in the first place is they wanted less volatility.”

Part of that is because bonds produce steady income, something needed by retirees and other investors. And bonds bought today are offering more income because of the rise in interest rates. The yield on the 10-year Treasury has roughly doubled so far in 2022, recently jumping above 3% to its highest level since 2018.

Just remember that bonds can still lose more money, as this year demonstrates so painfully.

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

AP

FILE - European Commission President Ursula von der Leyen waits for the start of a round table meet...
Associated Press

EU prepares emergency plan to do without Russian energy

PRAGUE (AP) — The European Union’s executive arm on Friday pledged to draft an emergency plan this month aimed at helping member countries do without Russian energy in the wake of the Kremlin’s war in Ukraine. European Commission President Ursula von der Leyen said the initiative would build on EU moves to ditch Russian coal, […]
10 hours ago
Associated Press

Environmental justice advocates slam Supreme Court ruling

The Supreme Court decision to limit how the Environmental Protection Agency regulates carbon dioxide emissions from power plants could make an already grave situation worse for those affected most by climate change and air pollution, advocates say. Environmental and climate justice advocates from across the United States are decrying the court’s 6-3 ruling, saying it […]
10 hours ago
Associated Press

Germany wants ads, influencers to note use of beauty filters

BERLIN (AP) — German state officials said Friday that they want advertisers and social media influencers to label any photos that have used so-called beauty filters. Critics argue that the filters, which offer easy ways to touch up images and remove supposed blemishes, promote unrealistic standards of beauty particularly among women and girls. The dpa […]
10 hours ago
Associated Press

Bear cub rescued after getting head stuck in plastic jug

HARWINTON, Conn. (AP) — Wildlife biologists in Connecticut had to rescue a bear cub that got its head stuck in a plastic container, state wildlife officials said. The misadventure happened June 23 when a mother bear with three cubs knocked over a garbage can in the town of Harwinton in Litchfield County, and one of […]
10 hours ago
A passenger jet streaks toward a landing at Reagan National Airport in Arlington, Va, Thursday even...
Associated Press

Pre-pandemic sized crowds descend on US airports for holiday

The July Fourth holiday weekend is off to a booming start with airport crowds crushing the numbers seen in 2019, before the pandemic. Travelers seemed to be experiencing fewer delays and canceled flights early Friday than they did earlier this week. The Transportation Security Administration screened more than 2.4 million travelers at airport checkpoints on […]
10 hours ago
A passenger jet streaks toward a landing at Reagan National Airport in Arlington, Va, Thursday even...
Associated Press

Pre-pandemic sized crowds descend on US airports for holiday

The July Fourth holiday weekend is off to a booming start with airport crowds crushing the numbers seen in 2019, before the pandemic. Travelers seemed to be experiencing fewer delays and canceled flights early Friday than they did earlier this week. The Transportation Security Administration screened more than 2.4 million travelers at airport checkpoints on […]
10 hours ago

Sponsored Articles

...
Dr. Richard Carmona

Great news: Children under 5 can now get COVID-19 vaccine

After more than two years of battle with an invisible killer, we can now vaccinate the youngest among us against COVID-19. This is great news.
...
Carla Berg, MHS, Deputy Director, Public Health Services, Arizona Department of Health Services

Vaccines are safe if you are pregnant or breastfeeding

Are you pregnant? Do you have a friend or loved one who’s expecting?
...
Arizona Division of Problem Gambling

Arizona Division of Problem Gambling provides exclusion solution for young sports bettors

Sports betting in Arizona opened a new world to young adults, one where putting down money on games was as easy as sending a text message.
Bonds, haven for elderly and cautious, are getting torched