Bonds are supposed to be steady, reliable, even boring investments—but they’ve created plenty of drama this year. The Bloomberg US Aggregate bond index plunged 6% in the first quarter of 2022, its worst performance in 40 years. Reason: Already-elevated inflation rates went stratospheric, hitting 8.5% year-over-year in March due to a series of global shocks. China’s new COVID-19 lockdowns extended supply-chain bottlenecks, and the war in Ukraine sent energy and food prices soaring. The Fed responded with plans to raise short-term interest rates aggressively. And the yield on a 10-year Treasury bill spiked from 1.5% to 2.5%. When yields rise, the market value of bonds decline.
Good news: The worst may be over this year. Higher interest rates should moderate inflation, and the 10-year Treasury yield is unlikely to rise much past 3%. Best opportunities now…
Buy Treasury inflation-protected securities (TIPS). They have a built-in mechanism that increases the bonds’ face value during inflationary periods. After two years of strong gains, TIPs looked expensive, but a sharp pullback in the first quarter has made them attractive again. Recommended now…
Vanguard Inflation-Protected Securities Fund (VIPSX). Recent yield: 6.27%. Performance: –1.65%.*
Buy floating-rate securities. These bondlike loans made by banks to corporations don’t have fixed payout rates. Their rates typically reset every 30 to 90 days, adjusting upward as interest rates rise. Recommended now…
Fidelity Floating Rate High Income Fund (FFRHX). Recent yield: 3.27%. Performance: 0.47%.
*All performance figures are one-year performance through May 16, 2022.
