A quick sampling of recent headlines …
- Morningstar author Sandy Ward: “Bond Investors Facing Worst Losses in Years. With inflation still running hot, bond prices are sliding as the market looks for faster Fed rate hikes.”
- Bloomberg reporter Ye Xie: “… an unparalleled bond rout wiped 13% off a Bloomberg global index of government debt since its peak in January 2021 as the central banks unwound their pandemic-era stimulus.”
- Wall Street Journal reporter Sam Goldfarb: “Bond Market Suffers Worst Quarter in Decades. Rout has robbed investors of traditional haven as stocks and many other markets swing sharply.”
And from MFO’s Discussion Board …
- David Sherman of Cohanzick Management posted: “Fixed income has definitively been a total return blood bath since 3Q21 …” (His funds, however, have held up exceptionally well so far.)
- And from another voice on the board: “I’m throwing all my bond fund proceeds into cash until I can figure out where to invest it!”
Looking at first quarter 2022 performance of some notable bond funds:
- DODIX, Dodge & Cox Income Fund, long-time MFO Great Owl and Morningstar Gold rated core bond fund, down 5.2%. (And down 7% from its peak last fall.)
- PIMIX, Dan Ivascyn’s Allianz PIMCO Income Fund, largest multi-sector income fund by far and merits Morningstar’s Gold rating, down 4.2%.
- AGG, BlackRock iShares Core US Aggregate Bond ETF, down 5.9%. (It too down 7% from fall peak.)
Such drawdowns are the norm for stock fund investors, but not bond fund investors. The latter have enjoyed 40 years of generally declining interest rates, which tend to make most bond prices rise and hence the descriptive: “40-Year Bond Bull.”
Using MFO’s MultiSearch screening tool, we’ve generated calendar year returns and a growth chart for the three bond funds mentioned above (DODIX, PIMIX, and AGG). Since the Great Financial Crisis (GFC) of 2008, returns have been quite satisfactory. Granted, not every year, but pretty much. Even if 2022 turns out to be a down year for say DODIX, don’t the two consecutive 9% positive years of 2020 and 2021 get remembered? While PIMIX is not delivering the double-digit returns that made it the largest multi-sector income fund, its last negative year was 2008 … 13 years ago!
Every asset class has down periods. I honestly don’t understand how buy-and-hold investors can expect otherwise. Oil had years of underperformance. It traded below zero in 2020! Constructs like Ivy Portfolio, All-Weather Portfolio, Permanent Portfolio, and the simple Equity/Bond Balanced Portfolio attempt to diversify across multiple asset classes that (usually) are not highly correlated in order to mitigate the down periods, smooth-out the ride, and provide higher risk adjusted returns.
There are nearly 1400 surviving bond mutual funds and ETFs available in US today, at least three years old. Examining performance since their inception through February 2022, about 800 or 60% of bond funds have never delivered less than zero across any three-year rolling period, based on month ending total return. What’s more, 70% have never returned less than -1% per year and 75% not less than -2% per year. Not great, but not terrifying either (unless inflation is out of control).
Narrowing the universe to core bond funds, of which there are 150 survivors, the results are even more encouraging: 86% of core bond funds, or 6 of every 7, have never returned less than zero across any three-year rolling period! Below are the top ten by life-time annualized percent return (APR):
Several of these funds are old enough to experience periods of rising rates and inflation. To get some insight, we next examine the last Taper and Normalization period, from May 2013 to December 2018, when Fed announced plans to begin tapering bond purchases and attempted to raise the Fed Funds Rate above zero closer to historical norms. It climbed to 2.4% before capitulating. Basically, the Fed wanted to unwind its zero interest rate policy (ZIRP) and its quantitative easing (QE) efforts initiated during GFC. Guess what? All 109 surviving core bond funds delivered positive returns across all three-year rolling periods in that five and a half year stretch toward normalization … 100%. Here are the top ten core funds by return for that period:
Note that Stephen Liberatore’s TIAA-CREF Core Impact Bond Fund (TSBIX) is atop the list. Regular Discussion Board contributor bee recently posted an excellent interview with him on WealthTrack.
Our MultiSearch tool has several unique evaluation periods enabling evaluations like this one of rising interest rates. (Full list available on Definitions page under Display Period heading.) All MFO risk and performance metrics and ratings through March 2022, should post tomorrow evening Saturday, 2 April or early on Sunday, 3 April..
One last thing: Anyone who plans to hold an investment grade (IG) bond to maturity should not care about interest rate risk. So, why all the fuss? Perhaps part of it is fear of seeing red due to mark-to-market pricing in our Schwab accounts. But if investors held IG bonds in their safe deposit box, while receiving the promised dividends, they would not care! With perhaps the caveat of liquidity risk, investors should view bond funds similarly. (But do be If I’m wrong, please let me know.
As we weather the near-term storm caused by the Fed’s second attempt to normalize this past decade, I’m hopeful that investors, especially retirees, can soon earn more than zero on their CDs and other risk-free assets.