Leading strategists like Deutsche Bank looked back on 10-year Treasury Bonds and discovered that the current fall in favor of US Treasury bonds hasn’t been seen since 1788.
It’s true that this isn’t a perfect, one-to-one comparison. The economy of the 1780s differed significantly from today. However, many financial professionals are calling this one of the worst bond markets in recent history.
This development increases risk for many retirement accounts, because bonds were supposed to be the “safe” part of the portfolio. You can no longer assume a Treasury bond or note will be secure or offset potential losses from stocks and indices.
To better understand this challenge investors and advisors are facing, let’s break down why bonds are becoming more volatile, how this affects retirees, and common mitigation strategies investors may use when reviewing their retirement portfolio.
I’ve written about treasury bonds before. But, essentially: When interest rates, and thus yields go up, bond prices fall. Long-duration Treasury bonds have suffered from this dynamic since COVID. Ongoing stagflation increases inflation risks, making it challenging to reduce interest rates and raise bond prices. But this isn’t the only issue.
Heavy federal debt issuance, lack of foreign demand, and rate uncertainty have snowballed into a depressed bond market. Not only are bond prices lower, making it harder to sell older, long-duration Treasuries, but new bonds lack high yields. Cheap Treasury bonds, older bonds sold in the secondary market below face value, can sometimes be positive but these economic conditions make them less attractive.
This shift in bond attractiveness matters because most retirees hear the same classic advice: Put 60% of your portfolio in bonds or fixed assets and 40% in equities after retirement. The larger bond allocation is meant to cushion equity volatility. But this strategy is no longer reliable.
Now, retirees may hold bond allocations at risk of declining in value over the long-term. Lower bond prices makes selling these assets and purchasing new ones unattractive, but the yields also do not keep up with inflation.
But many of the greater risks are not obvious.
Let’s start with duration risk. Duration measures how much a bond's price moves for a 1% change in interest rates. For example, a fund with a duration of 7 loses roughly 7% in value if rates rise 1%, and gains roughly 7% if rates fall 1%.
Duration risk is often hidden in target-date funds. Many 2025 or 2030 funds hold aggregate bond indices with durations in the 5–7 year range. A retiree who assumes "bonds are safe and therefore stable" can be surprised that a bond fund dropped 10-15% in a bad rate year, which is exactly what happened broadly in 2022. And longer-duration holders have felt again as yields pushed toward multi-year highs this year.
The reason many retirees don’t see this risk is because bond funds never "mature" the way an individual bond does. An individual bond held to maturity returns your principal regardless of rate moves in between. It’s straightforward and easy to monitor. But a bond fund constantly rolls its holdings, so there's no consistent maturity date. Retirees moving from individual bonds or CDs into bond funds sometimes don't realize they've given up that principal-certainty feature.
"Low volatility" or "balanced" default options in employer plans often carry similar duration exposure as these target-date-funds without advertising it as prominently.
Sequence-of-returns risk, or when you withdraw your retirement funds, is another issue.
During withdrawal, order matters enormously, because you're selling shares regardless of price. This creates an asymmetry:
Sequence-of-return risk is why two people who retire five years apart with identical portfolios and identical withdrawal rates can have wildly different outcomes.
Someone retiring into a period of elevated or rising yields faces a double hit: bond holdings lose value from duration risk at the same time they're being sold down for income. This compounds the sequence problem rather than cushioning it.
Elevated yields also mean cash and short-term instruments pay more, which is actually a partial offset, a retiree can now get meaningful income from a bond ladder or T-bills without reaching for duration or equity risk, something that wasn't true in the near-zero-rate years.
So, what do you do when the “safe” option is no longer reliable? Every portfolio is different, but here are a few common ways that investors can better balance risk:
At Encompass Advisors, I specialize in long-term financial planning and retirement portfolios. Bonds have always been a core part of the planning process, but market shifts require adaptation. Navigating the unknown often requires an active, personalized, and objective view on each retiree’s goals, needs, risk tolerance, and risk capacity.
If you have a question about how the bonds market works, what this change means for your specific portfolio, or you have other concerns about retirement planning, I’m always open to help. Book a no-commitment, objective discovery meeting today and let’s talk about your retirement.
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