Executive Summary: Total Bond Market Index is on the verge of recouping its worst loss in nearly 40 years. That's a nice milestone—but it's not what really matters. The lesson here is that a bond fund's starting yield, not its price history, is what actually predicts future returns. I also debunk a common misconception about where bond returns actually come from.
Bonds are back … sort of.
Bond investors had it very (very) good for nearly four decades. From its 1986 inception through July 2020, Total Bond Market Index (VBMFX before 2001, VBTLX after) returned 6.1% per year with hardly a blip. Its worst loss was 5.8% in 1987, which the fund recovered in just four short months.
That all changed after the COVID pandemic. With inflation spiking to 9%, traders were selling bonds—pushing yields higher and prices lower. At its worst in October 2022, Total Bond Market Index was 17.4% below its July 2020 high—and that’s with interest reinvested!
That’s a decline unlike any in the fund’s history, making it by far the worst run for bonds most investors had experienced in their lifetimes.
Bond investors were, understandably, in the dumps.
But believe it or not, Total Bond Market Index is just 1.6% below its July 2020 high. It wouldn’t be unreasonable for the bond fund to notch a new record by the end of the year.
That’s welcome news for longtime shareholders. But let’s not pop the champagne quite yet.