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Why 2022 Has Been Such a Terrible Year for Bond Funds
"For example, the largest U.S. bond fund strategy, the $514.5 billion Vanguard Total Bond Market Index (VBMFX) is down 12.12% through Sept. 13, putting it on track for its worst year since its inception in 1986."
"The Vanguard fund has never posted two consecutive years of negative returns, and this year’s losses are much more extreme than those seen in other down years. Its biggest annual loss came in 1994 when it posted a 2.66% decline."
"In fact, 2022 may be on its way to the record books for more than just the size of the losses. This could be the first time on record that all types of bond funds have declined together in the same year. Every one of Morningstar’s 20 taxable bond categories is in negative territory for the year through Sept. 13."
It’s perhaps the oddest year I can remember. Generally, falling equities are good news for bonds. Real assets / miners haven’t held up any better, though a wee bit of green in that segment today. 2008 was worse for equities, but at least AAA bonds held up.
Cash is the “black hole” into which the outflows from all the other asset classes are being drawn! Something’s gotta give. But we might not like what we get.
@derf, I stay with TRP floating rate fund for its short duration (<1 yr) although junk quality. Giruox holds floating rate bonds in his bond allocation. Think that help PRWCX to survive the bond downfall. I sold off most of broad based bonds early this year. For now, no dipping into bond funds until rate hikes are done. I rather gaining 3-4% in treasuries (hold to maturity) and losing 3% to inflation, rather than losing 20% to equities.
Generally, falling equities are good news for bonds.
Out of 94 years (1928-2021 inclusive), bonds rose over 80% of the time: 76 years (80.8%). Stocks fell in 25 of those years. Random chance would suggest that bonds would rise in 20 of those years. The actual number was 21.
Falling equities are good news for bonds merely because bonds have good news 4/5 of the time, regardless of what happens in equities.
A more interesting question IMHO is whether bonds outperform (their arithmetic average) in years when stocks underperform (their arithmetic average).
Over the same span of years, stocks had 8 more above average years (51) than below average years (43). Bonds had 28 more below average years (61) than above average years (33).
It turns out that in 54 years (57%), stocks and bonds had opposite fortunes - one asset class outperforming its mean, the other underperforming its mean. This may still not be all that significant.
Bonds help stabilize a portfolio in much the same way cash does - adding deadweight and almost always (80% of the time or more) kicking in a little extra.
Thanks @msf for that comparison. I was thinking of the highest grade bonds (government agency or government backed) when I alluded to bonds holding up well when stocks are falling. Should have so stated. And, my intent was to reference equity bear markets similar to what we are experiencing. (Should have so stated) Looking at it that way produces a different result.
“(Bonds) have historically performed well during equity bear markets, as measured by the Bloomberg US Aggregate Bond Index (Agg), returning over 6% on average. Of the three primary sub-components of the Agg, U.S. Treasuries bonds performed the best (+8.4% on average), living up to their safe haven profile, while corporate bonds, which introduce credit risk, have performed the worst (+2.6% on average)”
I gave figures for 10 year Treasuries. One can't get higher grade than that. Though both longer and shorter term Treasuries are included as well in aggregate figures.
Below is the data table in the quoted piece. For many reasons (enumerated below) I discount it. The conclusion given may or may not be correct, but it is not well stated and the arithmetic is suspect.
Issues:
1. "Falling" market, as hank described it, is different from "equity bear markets", which is in the text. However, the data itself covers "Bear (And Near Bear) Markets". This fuzzy definition doubles the number of data points (increasing the number of rows from 6 to 11).
2. It uses a fairly short time frame (Yogi and I provided data over twice as many years).
3. The "average" values in the chart are unweighted. A "bear-ish" market of one month 2/19/20 to 3/23/20 counts as much as a "bear-ish" market of 2½ years 3/24/2000 to 10/9/2002. Arguably weighting is incorporated by using cumulative returns (i.e. total return over each bear-ish market), but that just fixes (weights) the numerator without adjusting the denominator for the mean.
4. The medians are dubious. With 11 rows, the (unweighted) median should be the 6th highest (or 6th lowest) figure in each column. That's what is presented for the first column (1.8). But in the other columns, the median isn't a value in the column, let alone the middle one.
"I appreciate the link and just completely missed it."
@msf & @hank- on my screen at least, it's frequently very difficult to clearly see the text differentiation for links. That's why I use the "underline text" for links in my posts, so that they are easy to spot. Just a thought, gents.
Comments
"For example, the largest U.S. bond fund strategy, the $514.5 billion Vanguard Total Bond Market Index (VBMFX) is down 12.12% through Sept. 13, putting it on track for its worst year since its inception in 1986."
"The Vanguard fund has never posted two consecutive years of negative returns, and this year’s losses are much more extreme than those seen in other down years. Its biggest annual loss came in 1994 when it posted a 2.66% decline."
"In fact, 2022 may be on its way to the record books for more than just the size of the losses. This could be the first time on record that all types of bond funds have declined together in the same year. Every one of Morningstar’s 20 taxable bond categories is in negative territory for the year through Sept. 13."
Cash is the “black hole” into which the outflows from all the other asset classes are being drawn! Something’s gotta give. But we might not like what we get.
Out of 94 years (1928-2021 inclusive), bonds rose over 80% of the time: 76 years (80.8%). Stocks fell in 25 of those years. Random chance would suggest that bonds would rise in 20 of those years. The actual number was 21.
Falling equities are good news for bonds merely because bonds have good news 4/5 of the time, regardless of what happens in equities.
Data source: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
A more interesting question IMHO is whether bonds outperform (their arithmetic average) in years when stocks underperform (their arithmetic average).
Over the same span of years, stocks had 8 more above average years (51) than below average years (43). Bonds had 28 more below average years (61) than above average years (33).
It turns out that in 54 years (57%), stocks and bonds had opposite fortunes - one asset class outperforming its mean, the other underperforming its mean. This may still not be all that significant.
Bonds help stabilize a portfolio in much the same way cash does - adding deadweight and almost always (80% of the time or more) kicking in a little extra.
“(Bonds) have historically performed well during equity bear markets, as measured by the Bloomberg US Aggregate Bond Index (Agg), returning over 6% on average. Of the three primary sub-components of the Agg, U.S. Treasuries bonds performed the best (+8.4% on average), living up to their safe haven profile, while corporate bonds, which introduce credit risk, have performed the worst (+2.6% on average)”
Source
https://lplresearch.com/2022/05/24/how-do-bonds-perform-during-and-after-equity-bear-markets/
I gave figures for 10 year Treasuries. One can't get higher grade than that. Though both longer and shorter term Treasuries are included as well in aggregate figures.
Below is the data table in the quoted piece. For many reasons (enumerated below) I discount it. The conclusion given may or may not be correct, but it is not well stated and the arithmetic is suspect.
Issues:
1. "Falling" market, as hank described it, is different from "equity bear markets", which is in the text. However, the data itself covers "Bear (And Near Bear) Markets". This fuzzy definition doubles the number of data points (increasing the number of rows from 6 to 11).
For bear markets and corrections, see p. 4 here:
https://www.yardeni.com/pub/sp500corrbeartables.pdf
2. It uses a fairly short time frame (Yogi and I provided data over twice as many years).
3. The "average" values in the chart are unweighted. A "bear-ish" market of one month 2/19/20 to 3/23/20 counts as much as a "bear-ish" market of 2½ years 3/24/2000 to 10/9/2002. Arguably weighting is incorporated by using cumulative returns (i.e. total return over each bear-ish market), but that just fixes (weights) the numerator without adjusting the denominator for the mean.
4. The medians are dubious. With 11 rows, the (unweighted) median should be the 6th highest (or 6th lowest) figure in each column. That's what is presented for the first column (1.8). But in the other columns, the median isn't a value in the column, let alone the middle one.
@msf & @hank- on my screen at least, it's frequently very difficult to clearly see the text differentiation for links. That's why I use the "underline text" for links in my posts, so that they are easy to spot. Just a thought, gents.