Why Are Bond Funds Performing So Poorly?

Conservative investors have long valued the relative stability of bond funds over stocks. So, the decline in value of both stock and bond funds in 2022 may have come as a surprise. However, the real shock for most has been the rapid recovery of stocks while bond funds remain in negative return territory.

While markets rallied into the end of 2021, 2022 brought the war in Ukraine and a surge of inflationary pressures which collectively sank equity markets. Concurrently, the Federal Reserve started raising interest rates to stop the inflationary run-up, and not just a little bit, but significantly over several months.

Since bond yields and prices move in opposite directions, higher interest rates make the yields on existing bonds less attractive. This rapid increase in the Fed Funds rate, therefore, is what caused bond funds to decline in value, and it is what is keeping them down today.

It’s important to understand that these are not permanent losses. Over time, the decline in capital appreciation should be recovered by increased income from higher yields in bonds. However, this recovery will take time. Patience is key, as the bond market gradually adjusts to the new interest rate environment.

If these events caught you off guard, perhaps it’s time you met with your Francis financial planner for an investment check-up. Our team is researching and monitoring market activity and is well-prepared to help you make the most of it.

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