Is Now a Good Time to Invest in Bonds?

Last year, against the background of the Federal Reserve's rapid interest rate hikes, U.S. Treasury bonds experienced the worst year in the history of the past 250 years. In the past year, long-term Treasury bonds fell by 29.3%, which is the worst in any 12-month period. The worst performance has never been seen in the range, and the second worst situation dates back to 1980, when bonds fell by only 17.1% in a 12-month period. So the question is, after such a poor performance, do bonds have a chance to bottom out?

The data of the past 50 years summarizes the performance of the return-to-risk ratio of stocks and bonds under different economic growth and inflation environments. Blue represents stocks and green represents bonds. The four situations from left to right are: the economic growth rate increases, the economic growth rate decreases, the inflation rate increases, and the inflation rate decreases. It can be seen that bonds will outperform stocks only when the economic growth rate declines and inflation declines. Smart observers should have realized that the combination of these two situations is exactly the market environment we are in now.

In 2018-19, the performance of the long-term U.S. Treasury bond ETF TLT over 20 years rose by 35% in this year. Looking at the performance in 2019-20, TLT also rose by as much as 25%. In 2018-19, and 19-20, they are all cycles of Fed rate cuts. In an environment of falling interest rates, investing in bonds can become very profitable.