2009 was for bonds a year where risk paid big rewards, while the safety of places such as U.S. Treasurys (which protected so well in 2008) meant losses. First let's look at what happened with Treasury yields-- remember that when yields go up, prices go down. The interest rate paid on the 10-year Treasury note went from 2.25% at 12-31-08 to 3.75% currently while the interest rate on the 30-year Treasury bond went from 2.6% at 12-31-08 to 4.6% presently. To assess the effect on investors in these instruments, consider the 21% loss for year-to-date return on the iShares 20-year Bond Fund (symbol TLT).
While rising rates hurt investors in Treasurys, the improving economy meant big gains for investors in bonds with some credit risk (meaning some risk of default). In fact, more risk generally meant more return (just the opposite of 2008). The iShares Investment Grade Corporate Bond (LQD) has returned about 9% year-to-date. The Barclays High Yield Bond Fund (JNK) has earned 37% year-to-date.
Is there a lesson in all of this? To us the dramatic change from 2008 to 2009 for bond investors simply reinforces the importance of not simply following the crowd or reacting to what all of the TV "experts" or cable talk show hosts say. As always, successful bond investors in 2010 and beyond will be those who perform the hard work of constantly evaluating the risk/return opportunities of different bond sectors, maturities and issuers, and then have the courage to act in a manner that is at times contrary to popular opinion.