Can you lose money in bonds?
Certain bond types that trade in more liquid markets—such as Treasurys and certain corporate bonds—may be easier to sell than most municipal bonds, where markets are thinner and less liquid. Selling before maturity can result in either a profit or a loss compared with the price you paid at purchase.
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
Your money is at risk because there's a chance that the issuer won't be able to make repayments. Bonds tend to pay a fixed interest rate, although some returns are linked to a benchmark such as an index. The returns are potentially higher but you'll need to deposit your money over a longer period.
So, if the bond market declines or crashes, your investment account will likely feel it in some way. This can be especially concerning for investors with portfolios heavily weighted toward bonds, such as those in or near retirement.
Bonds, particularly government bonds, are often seen as safer investments during recessions. When the economy is in a downturn, investors may shift their portfolios towards bonds as a "flight to safety" to protect their capital. This shift increases the demand for bonds, raising their price but reducing their yield.
- Historically, bonds have provided lower long-term returns than stocks.
- Bond prices fall when interest rates go up. Long-term bonds, especially, suffer from price fluctuations as interest rates rise and fall.
The disadvantages of bond funds include higher management fees, the uncertainty created with tax bills, and exposure to interest rate changes.
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|---|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
Although bonds may not necessarily provide the biggest returns, they are considered a reliable investment tool. That's because they are known to provide regular income. But they are also considered to be a stable and sound way to invest your money. That doesn't mean they don't come with their own risks.
The chance of winning the £1 million jackpot over the course of a year (or 12 monthly prize draws) is one in 49,563,028 if you have £100 in Premium Bonds. If you have £1,000 invested, the odds of winning are one in 4,954,991. And if you have the maximum £50,000 in bonds, your chances increase to one in 96,839.
Why are my bonds losing money?
What causes bond prices to fall? Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value.
Moving 401(k) assets into bonds could make sense if you're closer to retirement age or you're generally a more conservative investor overall. However, doing so could potentially cost you growth in your portfolio over time.
The 1994 bond market crisis, or Great Bond Massacre, was a sudden drop in bond market prices across the developed world. It began in Japan and the United States (US), and spread through the rest of the world.
Starting yields, potential rate cuts and a return to contrasting performance for stocks and bonds could mean an attractive environment for fixed income in 2024.
CDs are an excellent place to park your cash and earn interest on your balance. Although there's a risk of inflation outpacing CD interest rates, they are virtually guaranteed earnings. Bonds, on the other hand, may deliver higher returns and regular income via interest payments.
The short answer is bonds tend to be less volatile than stocks and often perform better during recessions than other financial assets.
The interest income earned from a Treasury bond can result in a lower rate of return versus other investments, such as equities that pay dividends. Dividends are cash payments paid to shareholders from corporations as a reward for investing in their stock.
Bond returns have consistently exceeded the returns of cash and cash equivalents. From 2008-2022, bonds outperformed cash by a 2.1% annual average. While 2022 was the worst-performing year in the modern history of the bond market, the year's results failed to offset the outperformance of the preceding 15 years.
All bonds carry some degree of "credit risk," or the risk that the bond issuer may default on one or more payments before the bond reaches maturity. In the event of a default, you may lose some or all of the income you were entitled to, and even some or all of principal amount invested.
Bottom line. If inflation and investment safety are your chief concerns — TIPS and I-bonds deliver both. TIPS offer greater liquidity and the higher yearly limit allows you to stash far more cash in TIPS than I-bonds.
What is the best bond to invest in?
- iShares Core U.S. Aggregate Bond ETF (AGG)
- Vanguard Total World Bond ETF (BNDW)
- Vanguard Core-Plus Bond ETF (VPLS)
- DoubleLine Commercial Real Estate ETF (DCRE)
- Global X 1-3 Month T-Bill ETF (CLIP)
- SPDR Portfolio Corporate Bond ETF (SPBO)
- JPMorgan Ultra-Short Income ETF (JPST)
- iShares 7-10 Year Treasury Bond ETF (IEF)
Treasury bonds offer stability and predictability, making them ideal for risk-averse investors seeking to protect and preserve their capital. On the other hand, real estate can provide higher returns, ongoing cash flow, and potential tax benefits but involves more risk.
After 20 years, the Patriot Bond is guaranteed to be worth at least face value. So a $50 Patriot Bond, which was bought for $25, will be worth at least $50 after 20 years. It can continue to accrue interest for as many as 10 more years after that.
Series EE savings bonds are a low-risk way to save money. They earn interest regularly for 30 years (or until you cash them if you do that before 30 years). For EE bonds you buy now, we guarantee that the bond will double in value in 20 years, even if we have to add money at 20 years to make that happen.
They're available to be cashed in after a single year, though there's a penalty for cashing them in within the first five years. Otherwise, you can keep savings bonds until they fully mature, which is generally 30 years. These days, you can only purchase electronic bonds, but you can still cash in paper bonds.
