Unit 3 · Level 2 · Bonds & the boring half
2022: the year 'safe' fell
In 2022, inflation surged and central banks jacked rates up from around zero at historic speed. Global bond indexes fell double digits, their worst year in decades. Long-dated bond funds dropped 25-30%, and Austria's famous 100-year bond lost over 60% from its peak. Savers who'd bought bonds 'to be safe' were stunned. The see-saw and duration explain every bit of it.
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What you get asked
Why exactly did bonds get hammered so badly in 2022?
Starting yields near 0% meant almost no coupon income to offset price falls, and rates rising several points at once hit hard. The see-saw slammed down from the worst possible starting position.
Classic 60/40 portfolios (stocks/bonds) had a miserable 2022 because...
Bonds usually cushion stock crashes, but 2022's villain was inflation, which poisons both at once. Remember the unit-two warning: no hedge works in every kind of storm.
Bonds fell hard in 2022 because rates rose fast from near ___.
From 4%, a 1-point rise stings; from 0%, the climb to 3-4% was a multi-fold repricing with no income cushion. Where yields START determines how much room there is to fall.
Match each ingredient of 2022 to its role in the damage
Four ingredients, one historic mess. Any one alone is survivable; 2022 served all four simultaneously.
What's the silver lining AFTER a bond crash like 2022?
The crash WAS the repricing: new buyers in 2023 got 3-4% yields instead of zero. For bonds, painful price falls and better future returns are two sides of the same see-saw. 🐜
The rest of this unit
The see-saw of yields and prices, and the year 'safe' fell double digits.