This is Why Friends Don't Let Friends Buy Bond Funds

John Robinson |

This is Why Friends Don’t Let Friends Buy Bond Funds


Bond Index

2021 Total Return

YTD Return

(Through 2/28/2022)

Bloomberg 1-5Yr Gov Index



Bloomberg 5-10Yr Gov Index



Bloomberg U.S. Long Gov Index



Source: Vanguard Mutual Funds

By John H. Robinson, March 1, 2022

The inverse relationship between interest rates and bond valuations is a difficult concept for consumers to grasp. Part of the reason is that many investors have only seen interest rates move in one direction – down.  The steady decline in rates since the high inflation days of late 1970s and early1980s has produced an almost uninterrupted bull market in bonds that has caused nearly two generations of investors to come to believe that safe, steady, positive returns from bonds are a given. Unfortunately, the gravy train has reached its final destination.

For the past couple of years, interest rates on fixed-income investments (e.g., bonds and CDs) have hovered close to zero.  Zero is the end of the line for the bull market in bonds. Rates simply cannot go lower than that.  And now, with the well-publicized recent resurgence of inflation, we are beginning to see the ugly side of bonds. The other side of the inverse interest rate/price relationship is -

When Interest Rates Rise, Bond Values Fall

Although interest rates have only begun to nudge higher in the past few months, the table above offers insight into the risk of investing in bond mutual funds and is exactly why I have been telling investors to avoid bond funds and ETFs.  My impression is that some consumers believe that interest rates rising will mean their bond funds will pay them more.  As the table shows, it doesn’t work that way.  Increases in interest rates do not offset the decline in valuation, and the longer the maturities of the bonds in the fund or ETF the greater the valuation decline will be.  While now may be a very good time to begin moving money out of cash and into short-term CDs, in my opinion, it is definitely NOT the time to start wading back into bond funds.


Beware of Balanced Funds and Target Retirement Date Funds

Because bond mutual funds served up such steady returns over the last few decades, balanced mutual funds, which typically consist of 40-50% bonds and target-date mutual funds which gradually shift investors' assets from stocks to bonds as retirement approaches, have come to be regarded as conservative, all-weather stalwarts. Investors in balanced funds and target-date funds may soon be in for a rude awakening.

In a rising rate environment, these funds are not as stable as many investors have been led to believe.   In my view, investors today who are seeking a balanced allocation are better served by dumping such all-in-one funds and investing their desired equity allocation in stock index funds while allocating the bond fund portion into individual CDs or stable value funds that will not decline in value if rates continue to rise.  

High-yield corporate bonds (a.k.a. “junk bonds”) may be regarded as the canary in the coal mine for bond investors.  Here is a relevant Reuters article from February 1st and another article from Mutual Fund research firm, Morningstar on the general state of the bond funds at the beginning of 2022.

U.S. High Yield Bond ETFs see Record Outflows in January (Reuters)

Here are a couple more articles that lend support to my dim view of bond funds (and ETFs), balanced funds, and target-date funds.

Bond funds Start 2022 in a Sea of Red (Morningstar)


Stashing Your Money Under a Mattress Doesn't Look So Bad Compared to Bond Funds (Barron's)

Bonds Look Like a Bad Bet Now. Here's Why. (Barron's)


John H. Robinson is the owner/founder of Financial Planning Hawaii, Fee-Only Planning Hawaii, and Paraplanning Hawaii.  He is also a co-founder of fintech software-maker Nest Egg Guru.



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