Fixing Your Fixed-Income Portfolio

After a brutal year for bonds, prices are attractive and yields are high.

- NELLIE S. HUANG

If there’s any truth to the adage “It’s always darkest before the dawn,” then the sun should be heating up the bond market sometime soon.

Despite a short rally in December, the bond market suffered its worst decline in decades, thanks to the Federal Reserve’s swift and sizable interest rate hikes in 2022. Bond prices and interest rates move in opposite directions; when rates rise, bond prices fall. All told, there was “nowhere to hide,” says John Lovito, co-chief investment officer of global fixed income at American Century Investments. The broad bond benchmark, the Bloomberg U.S. Aggregate Bond index, fell a whopping 11.6% over the past 12 months. (All returns and yields are as of December 2.)

To make matters worse, stocks faltered, too, losing 9.6% over the past year. People buy bonds in part to cushion stock market declines, but this past year, bonds fared nearly as badly as stocks. “That’s left people with a sour taste in their mouths,” says financial adviser Lew Altfest, of Altfest Personal Wealth Management.

Things often seem at their worst before they get better, however, and these days, most analysts agree that the bond market is at an inflection point. “Bonds are going to be back in 2023,” says Luis Alvarado, an investment strategy analyst on the global fixed-income strategy team at Wells Fargo Investment Institute.