Ask most investors why they hold bonds, and you'll hear some version of the same answer: "That's my safe money."
Then you look at what that safe money has actually done.
Through August of this year, 2026, the Bloomberg U.S. Aggregate Bond Index had lost money over the trailing five years. That had never happened before in the index's history. The reaction is usually the same: how can my safe money lose money?
The answer isn't that bonds are broken. It's that most of us learned how bonds work during an unusual 40-year stretch and that stretch may be over.
A 40-Year Tailwind
From 1981 to 2020, interest rates fell almost without interruption. The 10-year Treasury peaked near 16% and eventually dropped to about half a percent during the pandemic. That long slide was a gift to bondholders. They collected interest and got price appreciation on top. An entire generation of investors came to see bonds as the part of the portfolio that simply doesn't go down very often.
Then the world changed. Inflation hit its highest level in four decades, the Fed raised rates aggressively starting in 2022, and the Aggregate index lost 13% that year, its worst on record.
How Rates and Bond Prices Work
Here's the core dynamic: when rates rise, existing bonds lose value. A bond paying 3% becomes worth less when new bonds are offering 6%. If you need to sell, you may take a loss. If you hold to maturity, you get exactly what you signed up for, but you earned less than you could have.
Bond funds add another layer of complexity. A fund never matures, so there's no date when you're scheduled to get your money back. And when other investors sell, the fund may have to sell bonds at a loss it might otherwise have held. Your outcome depends partly on other people's decisions.
Individual Bonds and the Bond Ladder Strategy
Individual bonds change that equation. They let you match your money to the date you'll need it. This strategy is called a bond ladder. You know exactly when each bond comes due and what you'll receive, as long as the borrower pays. You never have to sell into a bad market.
At today's rates, this approach is more attractive than it's been in years. Municipal bonds are also worth considering for those in higher tax brackets. The interest is generally exempt from federal income tax, and often state and local tax too, depending on where you live.
Use Bonds on Purpose
Bonds still have an important job in a well-constructed portfolio. They provide income, they can help steady a portfolio when stocks fall, and at today's yields they pay far more than they did a few years ago. But they aren't automatically safe, and for 40 years, falling rates covered up a lot of mistakes.
Take a look under the hood of your own safe money. Know what you own, when you'll need it, and what happens if rates rise again. The goal being to use bonds on purpose.
If you'd like help reviewing your fixed income strategy, reach out to a member of the SKG Team today!