Skip to content

Investment Strategy

January 04, 2023

2022: An Unusual Year for Bond Markets

Bond markets experienced an unusually tough year in 2022, with the Bloomberg Barclays U.S. Aggregate Bond Index (which represents the U.S. investment-grade bond market) down 15%. What made this even more unusual is that this occurred alongside a decline of 19.4% in the S&P 500 Index.1 Such coincident declines have occurred in only 4% of the calendar years since 1976. This unusual downturn has been driven largely by the Federal Reserve seeking to bring inflation under control with aggressive monetary tightening, which has upended the typical inverse relationship between stock and bond returns.

However, the unusual losses in bonds seem to be leading to higher yields, making bonds more attractive than stocks on a relative basis. Exhibit 1 shows the yield on 10-year U.S. Treasury bonds in blue and the dividend yield for the S&P 500 in yellow. For much of the COVID-19 pandemic, stocks were relatively more attractive than bonds because of their higher dividend yields. That has changed since the pandemic, with the yield premium on Treasuries sitting near its largest premium to the dividend yield on stocks since the start of the Great Financial Crisis in 2007, currently at 3.9% and 1.7%, respectively, as of January 2, 2023.

Therefore, although 2022 was quite unsettling, the move higher in bond yields sets investors up for higher longer-term expected returns going forward. Glenmede’s expected returns model now points to 10-year returns for stocks and bonds well above year-ago levels, leading to a total expected return for a simple 60% equities/40% bonds portfolio of near 7%.2

Of course, while taxable and tax-exempt bonds are more appealing than they were a year ago, investors should consider positioning differently within these respective asset classes due to the divergence of the yield curves. As show in Exhibit 2 (left chart), within tax-exempt accounts, investors are likely to still benefit from owning shorter-term bonds due to higher rates on the shorter end of the yield curve. For taxable accounts, municipal bonds do not appear to offer as disparately larger yields at the front of the curve, warranting more full duration exposure.

In summary, we draw several conclusions from this scenario:

  • In an unusual outcome in 2022, bonds have declined just as much as stocks during a very difficult year.
  • However, the unusual losses in bonds have led to higher yields going forward, making bonds more attractive on a relative basis.
  • The rising yields for bonds is a key component to rising expectations for the returns on a 60/40 portfolio.
  • Due to largely divergent yield curve structures, investors should target different duration positions in taxable and tax-exempt portfolios.

1 The S&P 500 is a market capitalization weighted index of U.S. large cap stocks.

2 In the 60% equity/40% bonds portfolio, equity is represented by a blended index consisting of 70% S&P 500 Index, 10% Russell 2000 Index and 20% MSCI All Country World ex U.S. Index. Bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index.

This material is intended to review matters of possible interest to Glenmede Trust Company clients and friends and is not intended as personalized investment advice. When provided to a client, advice is based on the client’s unique circumstances and may differ substantially from any general recommendations, suggestions or other considerations included in this material. Any opinions, recommendations, expectations or projections herein are based on information available at the time of publication and may change thereafter. Information obtained from third-party sources is assumed to be reliable but may not be independently verified, and the accuracy thereof is not guaranteed. Outcomes (including performance) may differ materially from any expectations and projections noted herein due to various risks and uncertainties. Any reference to risk management or risk control does not imply that risk can be eliminated.  All investments have risk. Clients are encouraged to discuss any matter discussed herein with their Glenmede representative.