Why bonds are likely here to stay | Vanguard (2024)

FAQs

Why bonds are likely here to stay | Vanguard? ›

Bonds are generally considered less risky than stocks because you're paid back before stockholders if the company faces financial trouble. Both stocks and bonds can be good investments, but they have different levels of risk and potential rewards.

The bond market in 2024 continues to exhibit topsy-turvy dynamics, with yields on short-term bonds exceeding those of some longer-term bonds. This inverted yield curve emerged in late 2022.

“As retirement moves closer, it could make some sense for investors to shift more of their portfolio into bonds as the lower volatility and principal preservation characteristics of the asset class become more valuable in a portfolio context.

Investment-grade corporate bonds remain attractive given their lower risk and relatively high yields. Long-term investors who can handle volatility might consider high-yield bonds and preferred securities, but we wouldn't suggest large positions in either.

Bonds tend to be less volatile and less risky than stocks, and when held to maturity can offer more stable and consistent returns. Interest rates on bonds often tend to be higher than savings rates at banks, on CDs, or in money market accounts.

2024 is 'a good time to hold bonds'

They are a good investment in 2024, experts say, for the same reasons they felt like a bad investment in 2022. That year, the Federal Reserve embarked on a dramatic campaign of interest-rate hikes in response to inflation, which reached a 40-year high.

Positive Signals for Future Returns

At the beginning of 2024, bond yields, the rate of return they generate for investors, were near post-financial crisis highs¹—and for fixed-income, yields have historically served as a good proxy for future returns.

However, it's worth noting that rising interest rates can't last forever, and bond ETF prices are likely to recover once rates go lower. While the ability to trade shares in them easily is part of what makes bond ETFs attractive, you may want to avoid selling these assets at a depleted price.

Key Takeaways. Most bonds pay a fixed interest rate, so existing bonds become more attractive if interest rates fall, driving up demand for them and increasing their market value.

May 1, 2024. Series EE savings bonds issued May 2024 through October 2024 will earn an annual fixed rate of 2.70% and Series I savings bonds will earn a composite rate of 4.28%, a portion of which is indexed to inflation every six months.

Why are bond funds performing poorly? ›

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.

As mentioned earlier, during a recession the Fed usually buys short-term government bonds, which has the effect of driving down short-term interest rates. The Fed usually targets a certain level of the “federal funds rate,” the interest rate that banks charge each other on very short-term (overnight) loans.

You can lose money on a bond if you sell it before the maturity date for less than you paid or if the issuer defaults on their payments.

If an investor is looking for reliable income, now can be a good time to consider investment-grade bonds. If an investor is looking to diversify their portfolio, they should consider a medium-term investment-grade bond fund which could benefit if and when the Fed pivots from raising interest rates.

When the Fed increases the federal funds rate, the price of existing fixed-rate bonds decreases and the yields on new fixed-rate bonds increase. The opposite happens when interest rates go down: existing fixed-rate bond prices go up and new fixed-rate bond yields decline.

They're well worth considering when building out your investment portfolio. They come with many potential benefits, including capital preservation, diversification, income, and potential tax advantages.

In line with 2023′s rising yields, the firm's outlook for bond returns increased from 2022. BlackRock's models call for a 5.0% expected 10-year return from U.S. aggregate bonds versus 4.2% in 2022 and less than 2.0% in 2021.

Most bond investors are in it for the long haul, meaning for the term of the bond, but there are several good reasons for selling bonds before they mature. They include: Selling bonds because interest rates are about to increase, making your existing bonds less valuable.