Bonds Have Been Awful. It’s a Good Time to Buy. (2024)

FAQs

Is it a good or bad time to buy bonds? ›

Answer: Now may be the perfect time to invest in bonds. Yields are at levels you could only dream of 15 years ago, so you'd be locking in substantial, regular income. And, of course, bonds act as a diversifier to your stock portfolio.

In 2022, as inflation surged to a four-decade high, the Fed raised the federal-funds rate at an unprecedented pace, and bond volatility leaped higher. Those wild price swings continued in 2023, as investor expectations for Fed rate hikes and cuts swung back and forth.

As inflation finally seems to be coming under control, and growth is slowing as the global economy feels the full impact of higher interest rates, 2024 could be a compelling year for bonds.

The good news about bonds is that in the short term they are relatively safe, and their volatility is minimal over the long term. The bad news is that over that long term, their returns aren't sufficient to create much wealth, especially after the effects of inflation (roughly 3% since 1928) and income taxes.

High-quality bond investments remain attractive. With yields on investment-grade-rated¹ bonds still near 15-year highs,² we believe investors should continue to consider intermediate- and longer-term bonds to lock in those high yields.

Although they may not necessarily provide the biggest returns, bonds are considered a reliable investment tool. That's because they are known to provide regular income. But they are also considered to be a stable and sound way to invest your money.

Bonds are often touted as less risky than stocks—and for the most part, they are—but that does not mean you cannot lose money owning bonds. Bond prices decline when interest rates rise, when the issuer experiences a negative credit event, or as market liquidity dries up.

Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.

Bonds could return as much as stocks, with far less volatility. Note: The projections use the MSCI U.S. Broad Market Index as a proxy for stocks and the Bloomberg U.S. Aggregate Index as a proxy for bonds. Source: Vanguard Capital Markets Model projections, as of December 31, 2023.

When to cash in bonds? ›

You can get your cash for an EE or I savings bond any time after you have owned it for 1 year. However, the longer you hold the bond, the more it earns for you (for up to 30 years for an EE or I bond). Also, if you cash in the bond in less than 5 years, you lose the last 3 months of interest.

If you want to keep all your good interest and get the most out of your I Bonds you should cash out: after earning 3 months of lower interest and. just after the 1^st of the month.

Government debt and the 10-year Treasury note, in particular, are considered among the safest investments. Its price often (but not always) moves inversely to the trend of the major stock market indexes. Central banks tend to lower interest rates in a recession, which reduces the coupon rate on new Treasurys.

When the interest rate drops during a recession, the yields paid on bonds can decline. Because of this, some investors prefer to hold short-duration bonds that mature quicker than long-term bonds. With long-term bonds, you could potentially lose more money on your initial investment.

Historically, bonds have provided lower long-term returns than stocks. Bond prices fall when interest rates go up. Long-term bonds, especially, suffer from price fluctuations as interest rates rise and fall.

Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.

For example, if you redeem a bond after 24 months, you'll only receive 21 months of interest. Depending on the interest rate of your bond and your own financial needs, it's generally beneficial to wait until full maturity to redeem them.

Why interest rates affect bonds. Bond prices have an inverse relationship with interest rates. This means that when interest rates go up, bond prices go down and when interest rates go down, bond prices go up.