Putting the Bond Market's Performance in Perspective

Interest rates are up a lot in the last six months. And as we have discussed in the past, rising interest rates hurt the value of outstanding bonds as well as most financial assets.

Why do we own bonds in your portfolio? They are there to minimize the volatility which the stock market bestows on us and provide some income.

But they did not help in the first quarter of this year, in fact they were down more than the stock market in the first quarter of 2022- a very rare event.

We have been concerned, like most of you, about interest rates going up from the historically low levels of the last several years. We had previously adjusted your bond portfolios to reduce your exposure to big moves in the bond market, but we didn’t eliminate that risk. How bad was the bond market’s performance historically? It’s return ranks as the third worst quarterly performance of the last 50 years (or 3rd worst of the past 200 quarters).

While the first quarter of 2022 produced a historically bad bond performance, a longer-term observation of the downside risks of the stock market versus the bond market may help put this unusual event in perspective.

Below is a chart that shows the biggest annual drops in the bond market and the stock market since 1973. The gold diamonds show the maximum drop in value during the year, while the green bars show the total return for that calendar year.

Source: Vanguard

As you can see, the volatility in the bond market is dwarfed by the volatility in the stock market. And this reduced volatility is why we own bonds in your portfolios, even though for the first three months of 2022 they did not serve that purpose.

The good news? With rates up, the bonds in our bond funds are maturing regularly and being replaced with the current higher yielding bonds. This will gradually be reflected with higher interest payments from the bond funds in your portfolio.

We thought it would be helpful to give you an idea of how unusually bad the first quarter of 2022 was for bond investors, but also to put that volatility in perspective for long term investors.

These are unusual times for all of us in many ways. We are seeing the first significant inflation in 40 years, at the same time there is a war in Europe, while parts of the world are still dealing with the Covid pandemic, while the Federal Reserve is increasing interest rates etc. We are sure we will be surprised again, with some unexpected positive news as well as concerning events.

But we are here continuing to evaluate strategies to ensure you are not exposed to any unnecessary risk, while also seeing if there may be new opportunities that are developing.

As always, we will stay in touch regularly but do not hesitate to call with any questions, thoughts or concerns.

Thank you as always for your trust and confidence in us.


Any opinions are those of Beach Foster and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained in this email does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Past performance may not be indicative of future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.