Bonds Still a Less Reliable Hedge | BlackRock (2024)

FAQs

Are bonds still a good hedge against stocks? ›

In those same down years, Treasuries have averaged a gain of more than 4%. And that number includes the downright awful year that was 2022. Most of the time bonds act as a good hedge against bad years in the stock market even if they're not a good hedge against bad years in the stock market all the time.

As it turns out, there now is an alternative to stocks. The bond market has gotten exciting again for investors, after roughly a decade in which the "income" part of fixed-income largely was missing. Higher yields since 2022 have been helping bond portfolios get their mojo back.

The rise in rates hurt bond prices throughout 2022, with the Bloomberg U.S. Aggregate Bond Index falling 13 percent for the year, the worst bond performance in decades. Bond prices and yields move in opposite directions, meaning prices fall as yields rise, and vice versa.

Bonds tend to be less volatile and generally outperform stocks during a recession. A bond is essentially a loan. Whether you get your investment back depends on the issuing entity repaying that loan. “Bonds, such as Treasurys, corporate bonds and municipal bonds, have contractual cash flows,” Kowalski says.

2024 is 'a good time to hold bonds'

They are a good investment in 2024, experts say, for the same reasons they felt like a bad investment in 2022. That year, the Federal Reserve embarked on a dramatic campaign of interest-rate hikes in response to inflation, which reached a 40-year high.

Bonds usually go up in value when the stock market crashes, but not all the time. The bonds that do best in a market crash are government bonds such as U.S. Treasuries. Riskier bonds like junk bonds and high-yield credit do not fare as well.

However, it's worth noting that rising interest rates can't last forever, and bond ETF prices are likely to recover once rates go lower.

Most bond investors are in it for the long haul, meaning for the term of the bond, but there are several good reasons for selling bonds before they mature. They include: Selling bonds because interest rates are about to increase, making your existing bonds less valuable.

Bonds are often touted as less risky than stocks—and for the most part, they are—but that does not mean you cannot lose money owning bonds. Bond prices decline when interest rates rise, when the issuer experiences a negative credit event, or as market liquidity dries up.

What is the safest investment if the stock market crashes? ›

However, several options tend to perform well or offer protection during market downturns. U.S. Treasury securities, particularly long-term bonds, are often considered a safe haven during crashes because of their government backing and tendency to rise in value when stocks fall.

Treasury securities like T-bills and T-notes are very low-risk as they're issued and backed by the U.S. government. They provide a safe way to earn a return, albeit generally lower than aggressive investments.

Picking bonds to beat stocks for as long as a decade is a bold call for a firm typically known for sticking to tried-and-true investing rules. While far more volatile, stocks have delivered average returns of about 10.2% over the past 100 years. That is roughly double the average return for bonds.

In summary, most of the time when stocks go down, bonds go up…but not all the time.

They include: Selling bonds because interest rates are about to increase, making your existing bonds less valuable. Selling bonds because its issuer has become financially unstable, raising the risk that it will default on its payments. Selling bonds to take advantage of a current upswing in its market value.

With risk comes reward.

Bonds are safer for a reason⎯ you can expect a lower return on your investment. Stocks, on the other hand, typically combine a certain amount of unpredictability in the short-term, with the potential for a better return on your investment.