Finding Steady Ground in a Shaky Bond Market

Lately, I’ve been getting a lot of questions about bonds. That doesn’t happen often. Bonds don’t usually steal the spotlight, but the market’s been acting strangely, and people are paying attention. If you’ve been wondering what’s going on, whether bonds still belong in your portfolio, or if it’s time to rethink your strategy, you’re not alone.

Let’s break it down.

Bonds 101

At their core, bonds are IOUs. When a company or government wants to raise money, they issue bonds. Investors lend them money for a fixed period of time, and in return, the issuer pays regular interest and eventually returns the principal.

This is fundamentally different from stocks, which represent ownership. When you buy stock, you’re purchasing a small piece of a company and sharing in its profits and its risks. Bonds, on the other hand, make you a lender. You’re entitled to regular interest payments, and, if a company runs into financial trouble, bondholders are typically paid back before stockholders.

Bonds are typically seen as lower-risk investments than stocks. But they come with two components you’ll want to understand:

1. Interest rate: the fixed annual interest rate you earn while holding the bond
2. Price: the value of the bond if you sell it before maturity

These two are inversely related. If interest rates rise, the value (price) of existing bonds goes down, and vice versa. For example, if you hold a bond paying 4% interest, but new bonds are promising 5%, your 4% bond becomes less attractive, so its value drops.

What’s Going On With Bonds?

Historically, short-term interest rates and long-term Treasury rates move in sync. When the Federal Reserve lowers short-term interest rates, long-term Treasury rates usually move lower as well.

Here’s where things have gotten interesting this year: over the last 12 months, the Federal Reserve has been cutting short-term interest rates, yet long-term Treasury rates, like those on 10- to 30-year bonds, have actually gone up.

So, why are short-term interest rates and long-term Treasury rates out of sync?

It comes down to what the Fed controls vs. what the broader market influences. The Fed sets short-term interest rates, which affect things like bank lending and savings. But long-term rates are determined by supply and demand in the open market. Right now, investors are demanding higher yields on long-term bonds. Why? Because they see more risk, and they want to be compensated for it.

The Fed is trying to project stability and guide the economy toward a soft landing, but investors aren’t convinced. Institutional investors are looking ahead and seeing more questions than answers about where the economy is headed.

Here are two big concerns currently weighing on the bond market:

• Inflation. Regardless of the Fed’s messaging, many investors expect inflation to linger. Inflation erodes the purchasing power of future bond payments. If you’re going to tie up your money for 10–30 years, you want higher interest to make that risk worthwhile.

• National debt. The U.S. government is borrowing heavily, and that rising debt makes investors uneasy. While a default isn’t expected, the government may need to issue more bonds to meet its obligations. It’s like trying to sell too many concert tickets. If there are more tickets than buyers, the seller has to offer a better deal to attract interest. In the bond market, that means offering higher interest rates.

So… Are Bonds a Good Investment Right Now?

Given all the chaos, should we run screaming from bonds? Absolutely not.

The news loves a dramatic headline, and it’s tempting to panic when you hear terms like “unprecedented.” But when the financial world feels shaky, it’s often best to return to the basics. And the fundamental value of bonds is stability.

Bonds may not deliver the same long-term growth as stocks, but they help smooth out the ride. They can provide steady income and act as a buffer during market volatility.

Many of my clients have been frustrated by bonds lately, especially after 2022, when inflation surged and bond prices dropped. That’s understandable. But today’s environment is different. Interest rates remain relatively high, and if they begin to fall, bond prices could rise. A well-diversified portfolio gives you the opportunity to benefit from that upside while still managing risk.

Should I Buy Individual Bonds or Bond Funds?

So if you’re ready to invest in bonds, how should you go about it?

You have two main options when investing in bonds:

• Individual Bonds: These are purchased directly through a brokerage firm or the U.S. Treasury. You’ll know exactly what the bond pays and when it matures. If you hold it to maturity, you get back the full principal, making them a predictable and often safer option. The downside is that if the issuer of the bond defaults, you could lose your principal (you are not as diversified as when you buy a Bond Fund / ETF).

• Bond Funds / ETFs: These are collections of many bonds managed together. They offer diversification and professional management, but their underlying prices fluctuate with interest rates. You won’t control the maturity dates, but they’re more accessible and easier to buy and sell.

Rebalancing in Uncertain Times

Now is a good time to review your portfolio and make sure you’re positioned appropriately. Don’t let the headlines scare you off from bonds. Talk with your advisor, reassess your bond exposure, and remember: smart investing isn’t about reacting to the latest news. It’s about sticking to the fundamentals, even when the market feels anything but normal.