Bonds are supposed to be the dull, no-nonsense part of an investor’s portfolio that’s historically delivered predictable returns with minimal risk. But who could have predicted that the Bloomberg US Aggregate Bond Index (the “Agg”), the fixed-income market’s most widely used proxy, would ever drag investors through a losing streak of more than two years?
From June 2021 through September 2023, the Agg consistently posted negative one-year monthly rolling returns (FIGURE 1). For the Agg, this was a slump of historic proportions that began, not coincidently, just as interest rates were coming off historic lows and several months before the Federal Reserve (Fed) started aggressively raising the federal funds rate. The policy rate would eventually rise by 525 basis points, marking the Fed’s rate-hiking campaign (March 2022 through July 2023) as the fastest tightening cycle in 40 years.