Bonds Are Back

March 25, 2022

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Last year, investors were earning pretty nice returns in the stock market but not much in the bond market. If you have bonds in your portfolio, you may have wondered if they were worth keeping around, especially if you’re new to investing.

Classic investment advice has always said that bonds are an important part of a balanced portfolio, but let’s face it - when the S&P stock index rises nearly 27% in a single year, bonds can seem like just a drag on your portfolio.

Our colleagues at Goldman Sachs Asset Management recently reported that bonds are starting to “behave more like themselves” in the changing market climate of 2022. It’s probably easier to understand the classic investment advice and appreciate the role of bonds today.

The role of bonds – steady income

In a nutshell, bonds are loans, while stocks are ownership of pieces of a company. (If you’re new to bonds, you might want to check out our primer on how bonds work.) They play different roles in a portfolio. Two of the main jobs of bonds are to provide income and stability.

Let’s talk first about income. When you own bonds, you get interest payments every year at a fixed rate. This can provide a steady flow of income. But last year, interest rates were at historic lows. And after two decades of largely falling rates, the Federal Reserve lowered rates even further to support the economy through the pandemic.

With ultra-low interest rates, some investors saw their bond income drop and may have wondered if these fixed-income investments were worth holding on to.

This year, interest rates are heading back up, as the Fed hikes rates to put the brakes on inflation. New bonds – with higher interest rates – can pay out more income.

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Bonds can help with stock volatility, too

The strong performance of the 2021 market meant investors weren’t focusing on looking for asset classes with more stability.

When stocks are bobbing and weaving (volatility) or just going down, bonds – which are traditionally less volatile – can offset risk and reduce your portfolio losses.

If you’ve taken a look at your portfolio these days, you’ve probably noticed that the stock market has experienced some dips early in 2022. What happened to bonds? Unusually, bond returns also went down during this time. (We say “unusually” because these two asset classes have only dropped together a few times in history.)

But even in early 2022, bonds’ returns decreased less, so you were still likely to end up with a larger balance in your portfolio if you had a mix of both stocks and bonds than if you were invested in the stock market alone.

What could happen if the dips continue? Well, history suggests that stocks and bonds won’t continue to move in the same direction for long. And while history isn’t a guarantee for the future, it can be a useful guide. Over the past three decades, when the stock market has dropped at least 15%, bonds have generally provided positive returns.

It’s not all about returns

Something else to keep in mind: Stability isn’t all about defending against stock volatility.

When you buy a bond, the entity who issues it promises to pay you back for the original sum of the loan (principal or face value) by a certain date. That’s different from investing in stocks, where you expect a return, but the issuer doesn’t make any promises.

So, with bonds, whether or not you make a profit, you’re likely to get your original money back. And that can be comforting.

The bottom line? Bonds might not have the star quality of growth stocks on the rise, but our Asset Management experts believe they continue to have important roles to play.

This article is for informational purposes only and shall not constitute an offer, solicitation, or recommendation. This article was prepared by and approved by Marcus by Goldman Sachs® but is not a description of any of the products or services offered by and does not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA is not providing any financial, economic, legal, accounting, tax or other recommendation in this article and it is not a substitute for individualized professional advice. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA, or any of its affiliates, none of which are a fiduciary with respect to any person or plan by reason of providing the material or content herein. Neither Goldman Sachs Bank USA, nor any of its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.