Keeping Your Bond Perspective: Declines, Rallies and the Role of Bonds
Don’t Let Emotions Derail Long-Term Goals
Without a doubt, market declines are disconcerting, particularly for bond investors. However, it’s important to keep these market movements in perspective. While 2021 and 2022 have been negative for the Bloomberg US Aggregate Bond Index, bond declines historically have been followed by strong performance. While no one can predict future returns, bailing out of bonds could mean locking in losses and missing out on a potential recovery.
Bloomberg US Aggregate Bond Index over time (January 1976 to December 2022)
Source: SPAR, Factset Research Systems Inc.
This example is for illustrative purposes only and are not intended to represent the future performance of any MFS® product.
The Bloomberg U.S. Aggregate Bond Index measures the US bond market. It is not possible to invest directly in an index.
An allocation to bonds may help offset stock declines
When market dynamics change, many investors are tempted to time the market. Rather than avoiding bonds, it’s important to remember the role that bonds have historically played in a well-diversified portfolio. While not in every case, when stocks posted their largest calendar year declines, bonds typically posted positive returns as you can see in the chart below.
Stock returns are calculated based on the S&P 500 Index. The S&P 500 Index measures the broad US stock market. Bond returns are calculated based on the Bloomberg US Aggregate Bond Index. Index performance does not include any investment-related fees or expenses. It is not possible to invest directly in an index. Keep in mind that all investments, carry a certain amount of risk, including the possible loss of the principal amount invested.
Past performance is no guarantee of future results. It is not possible to invest in an index.
Investments in debt instruments may decline in value as the result of, or perception of, declines in the credit quality of the issuer, borrower, counterparty, or other entity responsible for payment, underlying collateral, or changes in economic, political, issuer-specific, or other conditions. Certain types of debt instruments can be more sensitive to these factors and therefore more volatile. In addition, debt instruments entail interest rate risk (as interest rates rise, prices usually fall). Therefore, the portfolio’s value may decline during rising rates. Portfolios that consist of debt instruments with longer durations are generally more sensitive to a rise in interest rates than those with shorter durations. At times, and particularly during periods of market turmoil, all or a large portion of segments of the market may not have an active trading market. As a result, it may be difficult to value these investments and it may not be possible to sell a particular investment or type of investment at any particular time or at an acceptable price. The price of an instrument trading at a negative interest rate responds to interest rate changes like other debt instruments; however, an instrument purchased at a negative interest rate is expected to produce a negative return if held to maturity.
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