Not a usual year for bonds, but not a reason to change course

John Zeltmann |

August 15, 2022

A rapid rise in inflation roiled the stock and bond markets this year, resulting in the worst first half ever for U.S. corporate investment grade bonds. As we’ve previously noted, that’s atypical, as bonds often increase in value when the equities markets drop. As bonds play such a critical role in client portfolios, the next two articles, utilizing analysis by Vanguard1,2, help to put recent volatility into a long-term perspective.

This first article will help to explain why bonds are included in client portfolios, specifically:

The vital diversification role bonds play – especially during downturns



  • “As investors experienced in the fourth quarter of 2018 and the first quarter of 2020, stocks can plunge steeply for a time. In both cases, balanced portfolios saw their investment-grade bond allocations provide an important buffer.”
  • “Historically, bonds have helped to stabilize diversified investment portfolios by smoothing out returns. Bond prices tend to move in the opposite directions of stock prices, especially during periods of equity market turmoil.”
  • “Whatever direction the markets take in the short or long term, bonds can still serve as ballast against one of the primary risks faced by balanced portfolios: stock market risk.”



A bear market for bonds is nothing like a bear market for stocks



  • “For a majority of diversified, long-term investors, a potential bond bear market should not be viewed with the same level of apprehension as a potential equity bear market.”
  • “Indeed, even the worst 12-month period for the U.S. bond market historically saw a little more than just one-fifth the losses of the worst 12-month period for the U.S. equity market.”
  • “Vanguard research found that when stocks worldwide sank an average of roughly 34% during the global financial crisis, the market for investment-grade bonds returned more than 8%. Similarly, from January through March 2020 – the period encompassing the height of volatility in equities due to the COVID-19 pandemic – bonds worldwide returned just over 1% while equities fell by almost 16%.”




1 “A Bear Market for Bonds Is Nothing like a Bear Market for Stocks.” Vanguard, 31 Dec. 2020.
2 “The vital diversification role bonds play—especially during downturns.” Vanguard, April 2021.
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