Worried about bonds? You’re missing the point

Christine Benz, MDT/Morningstar

A friend close to retirement texted that she was concerned about the bond market. She’d been building out that fixed-income allocation over several years at her adviser’s urging.

Her message made me wonder if some people have misguided ideas about bonds.

Notwithstanding the headlines, bonds’ volatility is almost always mild alongside stocks’ fluctuations. On Sept. 1, 2026, when bonds grabbed the top headline on The Wall Street Journal’s website, total bond market index funds were down about half a percentage point. Returns for the year were barely in the red.

As the saying goes, “A bad year in the bond market is like a bad day in the stock market.”

Of course, the 2022 bond rout remains fresh in everyone’s minds. Amid seven Federal Reserve interest rate increases, the typical intermediate-term bond fund shed about 13%, and long-term Treasury bonds dropped nearly 30%.

Low starting yields exacerbated those losses. When yields rise, prices of existing bonds fall, but investors still receive interest payments that help offset declines. With 10-year Treasury yields around 1.5% in early 2022, that cushion was thin. At roughly 4.8% in 2026, yields offer more protection.

Another point that gets lost is why you hold bonds. Stocks are your growth engine; bonds and cash are the sleep-at-night portion of your portfolio, designed to hold their value or lose just a bit when stocks fall.

If potential bond losses are stressing you out, that can be a sound reason to change your holdings. You might sacrifice some return potential, but that’s OK. The goal is “return of capital, not return on capital.” Return on capital is why you hold stocks.

For specific spending needs, consider individual Treasury bonds and Treasury Inflation-Protected Securities held to maturity. This lets you lock in a yield, whereas bond mutual funds’ yields fluctuate with prevailing market yields. A laddered portfolio of inflation-protected securities is a popular way to address retirement spending needs.

Mutual funds or exchange-traded funds offer a less rigid alternative for people with less precise spending goals, though without the same principal protection as holding individual bonds to maturity.

With bond funds, be willing to give up some return potential for stability. For money needed within the next few years, stick with cash instruments such as money market funds or high-yield savings accounts. For spending horizons of three to 10 years, short- and intermediate-term high-quality bond funds are solid options. Losses remain possible, but matching duration to your anticipated holding period improves the likelihood of recovering them before you need the money.

Finally, get out of the timing business. Some investors shift into shorter-term bonds when they expect higher rates, then back into longer-duration bonds when they think yields have peaked. Most professional bond-fund managers don’t make active bets on interest rate sensitivity. Why assume individual investors have an advantage?

Morningstar’s “Mind the Gap” research shows the cost of ill-conceived timing decisions. Over the 10 years through December 2025, the typical taxable bond fund earned 3.0%, but its typical investor earned just 2.1%.

The question is whether your holdings fit your spending timetable and tolerance for losses, not whether tomorrow’s headlines will make you nervous.

Focus on your circumstances, and don’t take more risk than you need. Bonds should help you avoid unforced errors, not give you another market to second-guess.

[Abridged]