The Bond Conumdrum

It is not “new” news that bond investments have been challenged over the past several years. But many may not appreciate the nuances of these challenges including the depth, duration, and ultimate cause of them. So, let’s get into it.

Below is a chart of Blackrock’s iShares AGG ETF, which tracks the performance of the Bloomberg Aggregate Bond Index. For context there is about $120 billion invested in this one ETF, and trillions of dollars managed specifically against this benchmark by the various big investment management players including PIMCO, Vanguard, Fidelity, and DoubleLine.

In the chart, we show the AGG ETF since January 1, 2021. We picked January of 2021 because the Fed started raising rates shortly thereafter to combat inflationary forces in the economy. Please note that since the end of 2021, the total return to the AGG is -14.38%. One could argue bonds have found their footing, trading sideways since the end of 2022. However, we are not completely certain of this and we will show you why next.

Bond returns are off their bottom (for now) but, we’ve yet to see a total recovery of the drawdown in the Aggregate Bond Index. Below is a picture of the drawdown in AGG Since 2021 (the chart goes all the way back to 2004). While we are off the lows, the drawdown from all-time highs is still almost -19%, which means many good years are required for a full recovery in bonds. Also, it is not completely certain we have seen the end of the drawdown. Depending how inflation unfolds, there could be a need for the Fed to RAISE rates again. Data and time will tell.

At this stage, raising rates seems like only a small probability, but it is not certain it won’t happen. Since last summer, inflation progress has stalled and market-based interest rates have again moved higher. If inflationary forces resurface, then rising rate probabilities begin to rise. This is why the potentially inflationary Trump policies need to be watched. While Trump has been jawboning Fed Chair Jerome Powell to continue cutting rates to pump the economy, it’s hard to make the case for the need based on empirical evidence: inflation persists above the Fed’s target and the economy is strong.

Finally, we’d like to turn our attention to the treasury yield curve. The changes to this curve since the beginning of 2022 are THE PRIMARY CAUSE of the drawdown. Here’s a picture of the Treasury Yield Curve at the end of 2021 as compared to last week.

One can see rates have uniformly moved higher and this is the cause of the bond drawdown. The key to bond returns going forward is what happens to the SHAPE of the orange line above. Here are the scenarios: 1) It could shift even higher across the term structure, which would bring more pain to bond investors. 2) It could steepen through a combination of the short-term maturities coming down, and the long-term maturities going up. This would bring more pain to long duration bonds. 3) It could shift uniformly down, reversing the move we see in the chart above. This will be a BOON for bond investments and the AGG in particular.

At WealthPlan Group, our management of bond portfolios has been conservative, keeping the duration of the portfolio much shorter than the aggregate bond index, while simultaneously emphasizing floating rate and adjustable-rate instruments. So far this has been rewarded with our portfolios avoiding a significant portion of the pain experienced in the Bloomberg Aggregate Bond Index. If inflation progress continues to the Fed target, rates will come down and bonds will flourish. We will wait to lengthen duration exposure until we 1) see empirical evidence of inflation progress, and 2) when we become more confident the yield curve will normalize and return to an upward sloping posture. We thank you for your patronage and interest in our investment management.


The Bloomberg US Aggregate Bond Index is used as a benchmark for investment grade bonds within the United States. This index is important as a benchmark for someone wanting to track their fixed income asset allocation.

Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment.

The Treasury Yield Curve Chart was produced by WealthPlan Group generated from data gathered from https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2016

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed.

No investment strategy can assure success or completely protect against loss, given the volatility of all securities markets. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. All performance referenced is historical and is no guarantee of future results. Securities investing involves risk, including loss of principal. An investor cannot invest directly in an index.

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