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What Does a Bear Market Mean for Bonds?

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Well, I think one thing that people don’t realize is that even in a bear market, bond returns can be positive.  And in fact in the worst bear market in recent history, from 1954 to 1981, when interest rates went from 2% all the way up to 14%, returns from the broad bond market were generally positive. 

In fact the vast majority of those years had positive returns and only a handful had sort of small losses and the reason is that bonds generate income and income is always positive. 

And the income is usually what constitutes the majority of the return that you get in bonds. So for most people, I think higher interest rates may be a welcome event because their bond portfolios are going to start to generate more income and that’s usually why they invest in bonds.  

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or geopolitical conditions.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Potential share price movements of long-term bond funds cause greater risk to principal than with shorter-term funds.

High-yield bonds and lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, political instability, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Past performance is no indication of future results.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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