Market Minute
Insights From Our Investment Teams
Eyeing a Bounce-Back for Bonds
We think the anomalies of 2022 have unleashed opportunities for fixed-income investors in 2023.
An extraordinary combination of factors crushed global financial markets in 2022 and led to unusual losses for most asset classes.
Historically, bonds bounced back relatively quickly following a down year. This was mean reversion at work—the theory that asset prices eventually revert to their long-term average level.
Given their recent higher yields and defensive traits in economic slowdowns, we think investors should take a new look at bonds in 2023.
What Happened?
With inflation soaring to multidecade highs and the Federal Reserve (Fed) embarking on an aggressive rate-hike campaign to tame it, bond yields surged in 2022.
Russia’s invasion of Ukraine and the resulting energy sector uncertainty and geopolitical unrest agitated an already volatile market backdrop.
Meanwhile, recession risk escalated as high inflation and rising rates worked their way through the economy.
Financial markets struggled through most of the year. In an uncommon outcome, broad stock and bond indices ended 2022 with steep yearly losses.
Atypical Performance Patterns Characterized 2022
2022 Total Return for Stocks and Bonds
Data from 1/1/2022-12/31/2022. U.S. Bonds, International Stocks, and U.S. Stocks are represented by the following indices: Bloomberg U.S. Aggregate Bond, MSCI EAFE and S&P 500 ®. Source: Morningstar. It is not possible to invest directly in an index. Past performance is no guarantee of future results.
A Historic Year for Bonds
10-Year Treasury Total Return by Calendar Year Since 1954
Data from 1/1/1954-12/31/2022. Source: Morningstar. Past performance is no guarantee of future results.
Why Does It Matter?
Historically, bonds bounced back relatively quickly following a down year.
As the chart shows, since 1954, there were only 16 calendar years in which the benchmark 10-year Treasury note recorded a negative return.
In several instances, the 10-year note rallied in periods following a down year.
For example, after posting a one-year return of –8.50% in 2013, the 10-year Treasury gained 10.56% in 2014. A gain of 18.18% in 1970 followed a loss of -5.52% in 1969.
These results highlight the historical pattern of fixed-income markets reverting to long-term performance trends.
10-Year Treasury Total Return Ranges by Calendar Year
Data from 1/1/1954-12/31/2022. Source: Morningstar.
What's Next?
We believe there are reasons to be optimistic about bonds.
Yields are at their highest points in several years. In addition to boosting investment income, higher yields can provide a cushion against market volatility.
Inflation is moderating. While inflation likely will settle higher than pre-pandemic levels, it has eased significantly from recent multidecade highs.
Fed tightening may be nearing an end. The Fed’s aggressive rate-hike cycle likely will conclude in the first half of 2023.
Recession risk raises bond market’s profile. As the effects of slowing economic growth unfold, demand for higher-quality bonds likely will grow.
Yields Haven’t Been This High in 15 Years
Data from 2/28/1992-2/28/2023. Source: Morningstar. Yield is the return an investor will realize on a bond or fixed-income security. It is calculated by dividing a bond's face value by the amount of interest it pays. Past performance is no guarantee of future results.
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Eyeing a Bounce-Back for Bonds
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
Generally, as interest rates rise, the value of the securities held in the fund will decline. The opposite is true when interest rates decline.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.