MW It has been another disappointing year for bonds. Why now isn't the time to throw in the towel.

By Joy Wiltermuth

Longer bond yields are on pace for their biggest four-year climb since 1981 - the tail end of Jimmy Carter's presidency

It has been another year of bare-bones returns in basic bonds.

An ugly December selloff in the Treasury market set up the benchmark Bloomberg U.S. Aggregate Index for a 2024 return of less than 1%, according to FactSet data.

That's a sharp retreat from its 5.25% return in mid-September, right before the Federal Reserve delighted the stock market with a jumbo interest-rate cut of 50 basis points - its first crack at lowering rates in four years.

While the Fed dictates short-term rates, most households and businesses finance things likes homes or cars with fixed-rate loans that are repaid over a decade or more. Those rates often hinge on the 10-year Treasury yield BX:TMUBMUSD10Y, which serves as a base rate for many loans.

After a sharp rise in recent months, the 10-year yield has shot up nearly 70 basis points this year to 4.546%, putting it on pace for its biggest one-year yield jump since the bond market's historic rout of 2022, according to Dow Jones Market Data.

The benchmark rate also was on pace for its largest four-year yield gain since 1981, according to the data - the tail end of former President Jimmy Carter's one term in the White House, when inflation was pegged at a stunning 10.3% yearly rate. Yields move in the opposite direction of bond prices.

The rise in bond yields since 2020 - as well as borrowing costs - has been a bitter source of hardship for lower-income U.S. households and has kept a tight lid on sales activity in the housing market.

See: The Fed's rate cuts were supposed to make borrowing cheaper. So why is it harder than ever to buy a house?

Bond investors also were reminded this year of how difficult it can be to earn a solid annual return in basic bonds, as monetary policy and the economy both recalibrate to something more "normal" after more than a decade of running on ultralow rates.

"That transition period was absolutely painful," said Jim Baird, chief investment officer at Plante Morgan Financial Advisors, in an interview with MarketWatch. But current starting yields also have been some of the highest since 2008, he noted, which matters especially if early next year sees a continuation of the recent sharp volatility in the stock market.

"Historically," a 10% correction in the stock market has been "part and parcel about investing in stocks" most years, Baird said, adding that he wouldn't be surprised by a drawdown of that size next year. After all, a few highflying technology companies continued powering stock gains this year, with the S&P 500 index SPX only seeing a few brief pockets of weakness.

"We could stay higher for longer from here," Baird said of the 10-year Treasury rate, speaking to jitters about policies under the second Trump administration. "But it would seem the worst of the challenge for investors" is now in the rearview mirror, he said - adding that despite the selloff in recent months, investors might consider locking in 5-year Treasury yields BX:TMUBMUSD05Y recently at 4.32% as a part of their portfolios.

A brutal patch for bond returns began in September as buyers sold longer Treasury bonds. The action has been fed by concerns about the staying power of inflation, the growing U.S. deficit, and worries about more potential tax cuts and tariffs after November's "red sweep" by Republicans in the election.

"Most fixed-income asset classes are on track to produce low-single-digit returns for the year, far underperforming equity-market returns," said Brian Rehling, head of global fixed-income strategy at the Wells Fargo Investment Institute, in a Monday client note.

This year was one "that rewarded those that took risks," Rehling wrote, pointing to what was a big year for stocks but also for riskier high-yield bonds and preferred securities.

Still, "it is worth remembering why fixed-income investments are typically part of most diversified investment portfolios," he said - namely, that blending fixed-income into a portfolio historically helps keep volatility in that portfolio in check.

"While risk assets saw the best performance in 2024, the future is not certain, and abandoning fixed-income investments could lead to underperformance in a year in which risk assets struggle," Rehling said.

Stocks ended lower Monday, but were well off the session's worst levels. That had the S&P 500 on pace for a 23.8% return this year, the Dow Jones Industrial Average DJIA 13% higher on the year and the Nasdaq Composite COMP up 29.8% in 2024, according to FactSet.

Shares of the iShares Core U.S. Aggregate Bond ETF AGG, the main exchange-traded fund tracking the Bloomberg U.S. Aggregate Index, were 2.3% lower on the year so far.

-Joy Wiltermuth

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December 31, 2024 06:00 ET (11:00 GMT)

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