What You Need to Know About Investing in Bond Funds

I'm Tyler, a former financial advisor and portfolio manager, and now I create financial content for free to help you make informed investment decisions. Here’s the only thing you will ever need to know about investing in bond funds.

1. Recent Performance of Bond Funds

Over the last few years, anyone investing in bond funds would have faced significant losses. In 2021, Vanguard's total bond fund, BND, turned negative. By 2022, it lost 13% of its value.

2. Correlation with Stocks

Even worse, stocks and bonds were almost directly correlated, moving in the same direction. This means that bonds didn’t provide the expected hedge against market downturns, which is typically one of their key benefits.

3. Interest Rates and Bond Values

This information is textbook: when interest rates go up, bond values go down. That's what we saw happen in 2022. Bond fund managers were left holding a significant amount of bonds that had suddenly lost a lot of their value.

4. Current Market Trends

However, now that rates are going down, these same bond fund managers are holding onto bonds that are worth a lot more. The more rates are cut, the more attractive these bond funds typically become.

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