Bonds, typically one of the safest and most reliable investment tools, had a historically bad year in 2022, leading to lower returns for investors.
The downturn illustrates how COVID-19 has upended the economy in ways that continue to reverberate throughout the financial sector and how the Federal Reserve’s campaign to control sky-high consumer prices with a series of aggressive interest rate hikes has affected markets more broadly. But financial experts predict there’s some good news on the horizon — even with the potential for a recession. With recent inflation readings showing the start of a cooldown, the Fed is expected to slow the pace of its interest rate increases.
In December, the Fed’s forceful policy moves finally showed early signs of paying off. Fresh figures from the Department of Labor showed that inflation had grown at a slower pace than expected the month prior, marking two consecutive months of decline. As a result, the central bank cautiously approved a smaller interest rate hike of half of a percentage point — but warned that there could be economic pain on the horizon.
Bonds lost value in 2022 as a result of surging interest rates, Roth said. “[I]t’s essential because people now want a higher interest rate return on their bonds, making existing bonds and bond funds with lower yields less valuable,” he wrote.