Bonds see another disappointing year of returns, with yields on pace for biggest four-year climb since 1981. But it’s a good time for buy-and-hold investors. - Getty Images
An earlier version of this article misspelled the name of Plante Moran Financial Advisors.
It has been another year of bare-bones returns in basic bonds.
An ugly December selloff in the Treasury market set up the benchmark Bloomberg U.S. Aggregate Index for a 2024 return of 1.4%, according to FactSet data.
While the Fed dictates short-term rates, most households and businesses finance things likes homes or cars with fixed-rate loans that are repaid over a decade or more. Those rates often hinge on the 10-year Treasury yield BX:TMUBMUSD10Y, which serves as a base rate for many loans.
After a sharp rise in recent months, the 10-year yield has shot up nearly 70 basis points this year to 4.58%, putting it on pace for its biggest one-year yield jump since the bond market’s historic rout of 2022, according to Dow Jones Market Data.
The benchmark rate also was on pace for its largest four-year yield gain since 1981, according to the data — the tail end of former President Jimmy Carter’s one term in the White House, when inflation was pegged at a stunning 10.3% yearly rate. Yields move in the opposite direction of bond prices.
The rise in bond yields since 2020 — as well as borrowing costs — has been a bitter source of hardship for lower-income U.S. households and has kept a tight lid on sales activity in the housing market.
Bond traders also were reminded this year of how difficult it can be to earn a solid annual return in basic bonds, as monetary policy and the economy both recalibrate to something more “normal” after more than a decade of running on ultralow rates.
“That transition period was absolutely painful,” Jim Baird, chief investment officer at Plante Moran Financial Advisors, said in an interview with MarketWatch. But current starting yields also have been some of the highest since 2008, he noted, which matters especially if early next year sees a continuation of the recent sharp volatility in the stock market.
“Historically,” a 10% correction in the stock market has been “part and parcel about investing in stocks” most years, Baird said, adding that he wouldn’t be surprised by a drawdown of that size next year. After all, a few high-flying technology companies continued powering stock gains this year, with the S&P 500 index SPX only seeing a few brief pockets of weakness.
“We could stay higher for longer from here,” Baird said of the 10-year Treasury rate, speaking to jitters about policies under the second Trump administration. “But it would seem the worst of the challenge for investors” is now in the rearview mirror, he said — adding that despite the selloff in recent months, investors might consider locking in 5-year Treasury yields BX:TMUBMUSD05Y recently at 4.39% as a part of their portfolios.
Ways to play bonds
A brutal patch for bond returns began in September as buyers sold longer Treasurys. The action has been fed by concerns about the staying power of inflation, the growing U.S. deficit, and worries about more potential tax cuts and tariffs after November’s “red sweep” by Republicans in the election.
“Bond traders buying and hoping prices would go up — and be competitive with stocks going up nearly 25% — clearly those people were disappointed in the past couple of years,” Mark Malek, chief investment officer at Siebert, said in a phone interview.
But for a second group of investors, namely people looking to hold their bonds to maturity, Malek said the past two years of higher 4% to 5% Treasury yields “have been a watershed opportunity for people to make those investments.”
Similarly, shorter Treasury bills BX:TMUBMUSD03M BX:TMUBMUSD06M that mature in a year or less still were yielding over 4% at year’s end. “It’s a phenomenal opportunity if anyone is concerned over the next few months to pick up the most riskless security in the world,” he said.
Furthermore, while exchange-traded funds remain a popular way for investors to gain bond exposure, they only serve as a proxy, lack a maturity date unlike individual bonds and can fluctuate in price like a stock. Their prices also haven’t shot up this year like stocks.
“Most fixed-income asset classes are on track to produce low-single-digit returns for the year, far underperforming equity-market returns,” Brian Rehling, head of global fixed-income strategy at the Wells Fargo Investment Institute, said in a Monday client note.
This year was one “that rewarded those that took risks,” Rehling wrote, pointing to what was a big year for stocks but also for riskier high-yield bonds and preferred securities.
Still, “it is worth remembering why fixed-income investments are typically part of most diversified investment portfolios,” he said — namely, that blending fixed-income into a portfolio historically helps keep volatility in that portfolio in check.
“While risk assets saw the best performance in 2024, the future is not certain, and abandoning fixed-income investments could lead to underperformance in a year in which risk assets struggle,” Rehling said.
Stocks traded lower Tuesday in the year’s final session. Still, the S&P 500 posted a 23.3% return this year, the Dow Jones Industrial Average DJIA ended 12.9% higher and the Nasdaq Composite COMP was up 28.6% in 2024.
Shares of the iShares Core U.S. Aggregate Bond ETF AGG, the main exchange-traded fund tracking the Bloomberg U.S. Aggregate Index, were 2.4% lower on the year.
“If something crazy does enter the market, you’d be very happy to own bonds, because you would see yields collapse,” Malek at Siebert said. “What’s different this time around is, there’s actually room for them to go down.”
