Key Takeaways
- Bond prices move opposite to interest rates; duration tells you how much, roughly the percent loss per 1% rate rise.
- Own bonds for ballast and known future spending, which argues for high-quality, short-to-intermediate holdings.
- With real yields positive again, bonds are back to doing their job: paying you to be patient.
A bond is a loan you make, to a government or a company, that pays interest and returns principal at maturity. Simple, until 2022 handed diversified investors a double-digit bond loss and a question: why did the "safe" part of the portfolio fall? The answer is duration, and understanding it, along with credit risk and the yield curve at a working level, is all the bond knowledge most investors need.
Duration: the One Number That Explains 2022
When market interest rates rise, existing bonds paying yesterday's lower coupons are worth less; when rates fall, they are worth more. Duration approximates the sensitivity: a fund with duration 6 loses roughly 6% of value per one-point rate rise. In 2022 rates rose several points from near zero, so intermediate funds fell double digits, exactly as the math promised, painful, but not a malfunction. The consolation is mechanical: after the drop, the fund's yield reset higher, and holders who stayed have been earning it back at better rates.
Credit: the Other Risk, and the One to Be Stingy With
Credit risk is the chance the borrower does not pay. Treasuries define the risk-free end; investment-grade corporates add modest yield for modest risk; high-yield bonds pay more and behave like mild equities, falling in the same storms your stocks do. Since the whole point of the bond sleeve is to hold value when equities fall, quality belongs at its core; reaching for yield with the ballast defeats its purpose. Basics and current rates are laid out at treasurydirect.gov.
Try it: the free Future Value Calculator takes a couple of minutes and shows you where you stand. Or explore investment management at Attend.
What to Actually Own
For most investors: a broad investment-grade index fund (aggregate index) or a Treasury fund, at intermediate or shorter duration matched loosely to when you will need the money; T-bills or money funds for cash-like needs; and, in taxable accounts at high brackets, municipal bond funds whose interest is federally tax-free. TIPS add inflation protection for retirees' spending floors. Individual bonds held to maturity suit specific dated liabilities (a tuition bill in 2031); funds suit everything else. Location matters: taxable bond interest is ordinary income, so bonds generally prefer pre-tax accounts.
Bonds in the Current Era
After a decade of near-zero yields, bonds again pay positive real interest, which restores the classic trade-off: several percent, nearly guaranteed, versus equities' higher-but-volatile expected return. That makes the allocation decision meaningful again, retirees can fund spending floors at decent rates, and the buffer bucket earns its keep while waiting. What has not changed: bonds are for stability and scheduled spending, not for excitement.
We build bond sleeves purposefully inside investment management, duration to the liability, quality at the core, munis where brackets justify.
Frequently Asked Questions
Are bond funds riskier than individual bonds?
Same underlying risks, different packaging. A fund never 'matures,' but a ladder of individual bonds is just a fund you manage yourself; held to matching horizons, outcomes converge.
Why not just use CDs and money markets?
Cash instruments carry reinvestment risk: when rates fall, your income falls with them. Intermediate bonds lock today's yields for years and appreciate when rates drop, which is exactly when portfolios want the help.
Should I own bonds at all in my 30s?
A young accumulator with stable income can defensibly hold few or none, per our allocation guide. Bonds enter as the horizon shortens or the stomach requires.
Tony leads Attend Wealth, a fee-based wealth management firm in Atlanta serving professionals, families, and business owners. Advisory services are held to a fiduciary standard. More about Attend
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