2022 was the worst year on record for U.S. bonds. What can we expect in 2023?

U.S. bonds are coming off their worst year in almost a half-century of record-keeping, but the question is, do they look poised for a better performance in 2023? 

THE BOND UNCERTAINTY PROBLEM 

Most of us know that inflation started demonstrating signs of easing in late 2022, giving Federal Reserve policy makers a chance to switch to a less-aggressive rate hike for 2023. Forecasters see the 10-year rate ending at around 3.5% this year, which could make an attractive entry point for some potential buyers to come in. 

A lot of repricing of Treasury yields already took place in 2022, and this is the best core bonds have looked in over a decade; that’s why economists think the prospects for fixed income are pretty attractive at current levels, and the consensus is that fixed-income returns are going to be better this year. 

Of course, this is hopeful thinking, but how do we know for sure? The fact is- We Don’t.  And is it smarter for today’s retirees to PREPARE for best-case scenario or worst-case scenario?   

At Summerlin Benefits Consulting, we believe in helping clients prepare for the worst while still positioning them to succeed when our market experiences best-case outcomes. The simple truth is that in 2023, there are still too many risk factors at-play to be certain in your bond yields. 

ONGOING RISKS TO BOND YIELD 

One big risk to bond performance would be if inflation doesn’t fall below 4.5% or 5% by mid-2023, which would force the Fed to push the fed-funds rate up toward 6% from 3.75% to 4%. 

A toxic combination is the ongoing “hot” inflation combined with the string of Fed rate hikes since last March. This has led to a punishing sell off in Treasurys over much of 2022.  In short, 2022’s sharp rise in the 10-year rate has been accompanied by a falling price in the underlying note, hurting existing bondholders. 

An example of this is the Bloomberg Aggregate Bond Index — the broadest domestic measure of the core fixed-income market and which includes Treasurys, agency mortgage-backed securities and investment-grade corporate debt. It declined 11.2% in 2022. That’s the index’s worst annual showing since 1976, the earliest period that data collecting began. 

Unfortunately, it has become obvious that the bond sector’s poor performance for 2022 has come as a rude surprise to investors accustomed to the steady performance that fixed income investments have experienced over the last several decades. Fixed income planning is a fundamental component of any savvy investor’s retirement plan. 

A BETTER OPTION TO BONDS IN 2023 

What it boils down to for 2023 is that there are other alternatives that may prove to be the better options for fixed income- without the uncertainty. 

One option is a fixed index annuity, where your return can be tied to a market index, but your principal is protected in down years. These accounts commonly follow market indexes like the S&P 500 or larger bond funds like Bloomberg, etc. But, this year, some fixed index annuities are also offering the option to just follow a fixed interest rate- many of which are ranging between 3% to 5% in comes cases, in lieu of following an actual market index. This means during a time when almost all investments, including bonds, are losing value, you may be able to guarantee a return that will help you safely ride out the recession and negate it’s impact to your retirement savings.   

Fixed index annuities (FIA’s) can also generate more income than bonds of similar maturity purchased at the same time and be better at holding value while generating a more predictable cash flow. FIA’s offer consumers Safety first and foremost, with a Reasonable Rate of Return over time, and guaranteed Increasing Lifetime Income- thus, solve the uncertainty of your bond portfolio. 

Of course, just like with stocks, bonds, or other investment options- not all annuities are created equal, especially during uncertain times like these, its important to use a safe money expert to help guide you through your options. 

At Summerlin Benefits Consulting, we specialize in helping our clients eliminate the uncertainty in their retirement planning and determine what path is best for their specific situation.