"Bond Fund Prison"

Historical Stock, Securities, Certificates, Fund, Bonds

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When Fed Chairman Jerome Powell said that his aggressive interest rate hikes would “bring some pain” for Americans, he wasn’t kidding.

While this year stocks are down big (S&P down 24 %, Nasdaq down 30 %), bonds and bond funds are down a staggering 30 to 40%.

Investors that followed the advice of brokers to invest a significant portion of their net worth at the start of the year in bonds and bond funds find themselves in “bond fund prison” with massive losses and anemic yields. To get out of prison, investors may be required to take significant losses.

Liquidity needs such as a new roof on a house, college expenses, funding a divorce, or worse, meeting margin calls on a declining portfolio, may force investors to unload low-yielding bond funds at a loss to generate cash needs.

In 2021 and early 2022, Morningstar and other market observers expected that the Federal Reserve would raise rates to fight inflation. The rising rates made the bond yields less attractive and pushed down bond prices.

Some of the biggest losses this year are in long-term bond funds and ETFs. The $ 25 billion iShares 20+ Year Treasury Bond ETF (TLT)  is down 30 %; PIMCO 25+ Year Zero Coupon U. S. Treasury Index ETF (ZROZ) is down 40%; the $78 billion iShares Core U.S. Aggregate Bond ETF (AGG) is down 15 %.

Unfortunately, many brokers made unsuitable recommendations that their clients invest a significant portion of their “safe money” in long-term bonds, bond funds, and ETFs to generate yield to meet investors' living expenses and retirement needs. Brokers sold 10, 20, 40 even 50-year bonds with annual yields of 2-3 %. Those “safe” investments are now deep in the red.

This over-concentration in bonds and bond funds has quickly become the “high-risk” portion of portfolios without any warning to investors.

Retirees and conservative investors with long-term bond losses may have recourse against their brokers who sold the bonds. By filing investment fraud claims at FINRA arbitration, investors may recover their losses and escape “bond prison.”v

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Disclaimer:This article does not contain investment, tax or legal advice.

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Wall St. Wolf 1 year ago Member's comment

Good stuff, thanks.