Bond Market Suffered Historically Poor 2022

The danger signs throughout the U.S. economy point toward even one of the historically safest and most stable investment vehicles – government bonds.

Bonds produced poor returns for investors in 2022, which was a historically bad year for government debt instruments. The bond market was hard hit in the last year by the Federal Reserve’s fiscal policy maneuvers to attempt to stem the tide of surging inflation.

Morningstar Research Services chief market strategist Dave Sekera said U.S. bond markets “experienced their worst annual performance since the inception of Morningstar’s fixed-income indexes.” He said that his research going back to 1976 indicates last year was the “worst performance for fixed income ever.”

Sekera added: “No part of the fixed-income markets was spared, as rising interest rates across the entire bond yield curve pushed down bond prices.”

Santa Clara University business professor Edward McQuarrie told reporters that inflation is “kryptonite” to the bond market. His review of the last year was even harsher than Sekera’s. McQuarrie said, “Even if you go back 250 years, you can’t find a worse year than 2022.”

Investment giant Fidelity said last month that Bloomberg Barclay’s US Aggregate Bond Index would show a loss in a second consecutive year in 2022 for the first time. The firm noted the simple market process in which “bond prices typically fall when yields rise.”

As the Fed engaged in rapid and steep interest rate hikes, “investors who feared falling prices sold bonds.”

With the COVID-19 pandemic fading in 2022, the Fed found itself shifting policies from “supporting markets to trying to fight inflation, and bond markets reacted badly,” according to Fidelity.

Financial experts are now left with hopes that inflation will subside. The inflation that plagued 2022 was caused by a combination of factors, led by massive federal spending that caused record spikes in the money supply. In addition, the new levels of cash in the economy were mismatched with a diminished supply of products because of the pandemic shutdowns, supply chain crunches globally, and a robust labor market.

U.S. stock markets also had a poor year in 2022, entering bear market territory in the first and second quarters amid surging inflation and rising interest rates.

Wealth Logic founder and financial planner Allan Roth wrote last week in an article for AARP: “Good riddance to 2022, at least from a financial perspective.” He noted that “bonds lost nearly as much as stocks, even when you count reinvested interest.”

Roth added that using “traditional statistical measurements, the loss for the first three quarters of the year should happen about once every 50 million years.”