Noting that 2022 was a bad year for bonds is a little like saying George Santos told a couple of fibs. The Bloomberg Aggregate Bond index, a broad measure of bonds that might be held in a typical American portfolio, lost over 13%n in 2022. The epic decline in traditionally conservative assets had no historical precedent, and many investors chose to bail on bonds.
The environment in 2023 is radically different and opportunity beckons as interest rates stabilize and a possible recession looms. Investors should consider including fixed income in a balanced portfolio, but the bond market remains something of a mystery to many people. Here’s an explainer.
A bond is a loan structured under defined terms that grants each investor (or bondholder) certain rights and guarantees in exchange for the use of their capital for a specified period. Unlike stock which can only be issued by corporations, bonds can be sold by numerous entities including corporations, governments, agencies, municipalities and even mortgage originators. In fact, bond issuance is so prevalent that the total value in the United States exceeds $53 trillion in over 1 million individual issues outstanding, compared with around 15,000 traded US stocks valued at $52 trillion.
While many investors express some confusion about bonds, they really are fairly simple and behave according to a mathematical relationship among a few key elements, unlike stocks which can vary sometimes inexplicably.
Maturity. Bonds are typically issued with a fixed maturity date upon which the agreement terminates, ranging from less than 1 year to 30 years or more. The bond pays a final payment on the maturity date and then ceases to exist.