NEW YORK – Suddenly, bonds are again living up to their reputation as the safe part of an investor’s portfolio.
As stocks sank worldwide over the last week on worries about the banking system following the second- and third-largest U.S. bank failures in history, bonds shot up in price. That offered some protection to any investor with a mixed set of stocks and bonds in their portfolio, as most advisers suggest.
Through the middle of March, the largest U.S. bond fund, Vanguard's Total Bond Market Index fund, returned 2% while the largest U.S. stock fund lost 2.7%. That may not sound like a big deal, but it’s a marked return to form for bonds.
Last year, they were anything but the safe part of a saver’s nest egg. Their prices plunged on fears about the highest inflation in generations and what the Federal Reserve was doing about it.
Inflation by itself makes bonds less attractive because it means the fixed payments they make will buy less stuff in the future as prices rise.
But the barrage of hikes to interest rates instituted by the Fed in hopes of getting inflation under control also inflicted pain. The Fed has vaulted its key overnight rate to a range of 4.50% to 4.75%, up from virtually zero at the start of last year. That helped pull yields higher across the bond market.
When that happens, newly issued bonds making higher interest payments suddenly look much more attractive than the older bonds already sitting in investors' portfolios. That makes prices in the market for those older bonds drop. And bond funds have to record such changes in price.
What made things worse for investors was that bond prices fell last year at the same time stocks did. The hope in having a diversified set of investments is that some will rise when others fall, keeping the overall portfolio safer. That didn't happen last year.
This month, though, bonds rallied as worries spread about the banking system following the collapse of Silicon Valley Bank. That helped to buffer anyone who was also invested in stocks or commodities.
“These are the safe haven assets that are actually acting like safe havens,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial. “You couldn’t say that last year.”
Of course, the rally means that bonds are carrying lower yields than just a week ago. That means they'll pay a little bit less in income than before and have a little smaller cushion for future price drops.