Dip Back Into the Bond Market

In the wake of sizable losses, yields have risen to attractive levels for income-starved investors.  

- ADAM SHELL

Bonds have been behaving badly. But the fixed-income market's comeuppance is a good thing for investors looking for better value and more income from their bond funds.

Historically, bonds have offered shelter for portfolios when financial storms touch down on Wall Street. But bonds have not been a haven this year in the grip of surging inflation and fast-rising interest rates. Instead, fixed-income assets ranging from U.S. Treasuries to higher-yielding "junk bonds" have logged double-digit percentage losses resembling declines suffered by more-volatile stocks. "A 10% drawdown in the stock market is common, but it is unprecedented for the bond market," says Lawrence Gillum, a fixed-income strategist at LPL Financial.

The bond market pain meter highlights this year's outsize declines and pokes a hole in the myth that bonds never lose money.

The Bloomberg U.S. Aggregate Bond index, which tracks the investment-grade bond market and serves as the benchmark for most bond funds, has fallen 10.6% so far this year through July 8-putting it on track for its worst annual return ever. (Its worst year up to now was 1994, when it fell 2.92%.) U.S. Treasuries with maturities of 10 years or more have taken an even bigger hit, tumbling 22.5%, according to the Bloomberg U.S. Long Treasury Total Return index. And high-yield junk bonds-those rated BB or lower, with a higher risk of default-have fallen 12.9%.

Bond experts have been surprised by the swift and steep drop in bond prices, causing yields, which move in the opposite direction, to spike sharply higher. "No, it's not normal at all," says Andy McCormick, head of global fixed income at fund company T. Rowe Price.