Bond Market Troubles in 2022: What Investors Need to Know
By It was a grim year for bond investors in 2022, according to the Barclay’s U.S. Aggregate Bond Index. It was the worst year in the bond market since 1976, with a 13% decline in bond prices. What caused this historic downturn and what does it mean for individual investors?
The cause of the bond market woes in 2022 was the U.S. Federal Reserve and its sister banks in the UK and Europe raising interest rates in an effort to combat inflation. This caused a major spike in interest rates, the highest since the 1980s, which caused the value of bonds to suffer. Inflation expectations and interest rates were both factors that caused bonds to be so bad in 2022.
Inflation expectations are key to understanding the bond market.[0] According to the Cleveland Federal Reserve Bank’s Center for Inflation Research, expected U.S. inflation over the next 10 years is 2.27% per year.[1] The interest rate offered on I bonds is recalculated every six months based on inflation rates, and if the Fed succeeds in reducing inflation to a more typical 2% interest rate, I bond holders could see their returns halved.[2]
Overall, the bond market in 2022 was a tough year for individual investors, and the repercussions of this downturn may still be felt in the coming months. It is important to stay up to date on inflation expectations and interest rates to ensure that you make sound investments in the future.
0. “Can bonds bounce back in 2023?” The Armchair Trader, 13 Feb. 2023, https://www.thearmchairtrader.com/can-bonds-bounce-back-in-2023
1. “Buying bonds now is a smart money move even if the Fed keeps hiking rates. Here's why.” MarketWatch, 14 Feb. 2023, https://www.marketwatch.com/story/buying-bonds-now-is-a-smart-money-move-even-if-the-fed-keeps-hiking-rates-heres-why-d76a06d5
2. “This Low-Risk 7% Investment Was All the Rage in January. Here's What You Need to Know.” The Motley Fool, 16 Feb. 2023, https://www.fool.com/the-ascent/personal-finance/articles/this-low-risk-7-investment-was-all-the-rage-in-january-heres-what-you-need-to-know
