When the economy slows down and markets start to dip, people naturally look for safer places to keep their money. Stocks feel risky. Cash feels like it’s losing value to inflation. And then bonds come up.
So, are bonds a safe bet?
The answer is: it depends.
Let’s break it down.
Why People Turn to Bonds in Uncertain Times
Bonds are considered more stable than stocks, especially when the economy is shaky. That’s because they pay a fixed interest rate, which can feel like a reliable source of income when everything else is uncertain.
But not all bonds are equally safe. Some are backed by the U.S. government. Others are issued by companies that might default in a downturn. So when we talk about bonds being “safe,” we have to be specific about which types we mean and what price you pay for safety.
The Safer Options: Treasuries and Investment-Grade Bonds
U.S. Treasury bonds are generally considered the safest type of bond. The federal government backs them, so the risk of default is basically zero. When uncertain about the market, a lot of investors move money into Treasuries, which drives up their prices and lowers yields.
If you’re looking for something conservative, short-term bonds are a good choice. They’re less sensitive to changes in interest rates compared to long-term bonds. Paying close attention to changes in yield curves helps find the sweet spot depending on your timeline and goal for the bond.
TIPS (Treasury Inflation-Protected Securities) are another option. If inflation sticks around during a recession -which can happen, TIPS can help preserve your purchasing power as they protect against unexpected inflation However, TIPS tend to be longer in duration, which carries risk. They also tend to be more volatile and should not be considered short-term assets.
High-quality corporate bonds also deserve a look. These are bonds issued by financially solid companies. They can offer higher yields than Treasuries without taking on the level of risk you’d get with lower-rated, high-yield (junk) bonds.
Where You Need to Be More Cautious
There are still risks, even with bonds.
One is credit risk—the chance that the bond issuer can’t make their payments. This is more of a concern with lower-rated corporate or municipal bonds. If a company or local government runs into financial trouble, bondholders could take a hit.
Then there’s interest rate risk. When the Fed cuts rates in the case of a recession, existing bonds with higher interest rates become more valuable. But if you’re holding long-term bonds, and interest rates go up unexpectedly (yes, that can still happen), your bond values could drop. This is what happened in 2022 – people got comfortable after decades of low interest rates and didn’t fully consider the risk in holding long-term bonds.
So while bonds can offer stability, it’s important to think about how sensitive they are to interest rate movements- and how reliable the issuer is.
What the Data Shows
History gives us a pretty good idea of how bonds behave in tough times. According to data from Morningstar and Forbes:
- During the 2008 financial crisis, intermediate-term Treasury bonds returned over 11%, while stocks lost a lot more.
- In many past downturns, bonds have delivered positive returns, especially U.S. Treasuries and high-quality corporates.
- The areas that tend to struggle the most are junk bonds and emerging market debt, mainly because investors become more risk-averse.
So the short version is: bonds – the right ones – have often done well when the rest of the market was struggling.
What to Do If You’re Investing During a Downturn
If you’re trying to build a “safer” portfolio, bonds still matter. But it’s not as simple as “just buy bonds.”
Here’s what we’d focus on:
- Stick to high-quality issuers. Government bonds, investment-grade corporate bonds, and strong municipal bonds.
- Watch your duration. Don’t go too long if you’re worried about rate changes.
- Diversify. Different types of bonds can behave differently, even in the same economic environment.
- Consider Bonds outside of the US. Each country has different yield curves and credit spreads. Often, bonds outside of the US offer opportunity and diversification.
At KEEN Capital, we see that bonds can be an important piece of a well-rounded portfolio, depending on your goals and circumstances. But there’s a lot of nuance to how they work, and it’s worth taking the time to get it right.
Bottom Line
Are bonds a safe bet?
For the most part, yes—especially if you’re in Treasuries or other high-quality options. But like any investment, they still come with risks. And not all bonds are created equal.
If you’re not sure how to approach your bond allocation right now, or you’re thinking about how to position your portfolio for a slowdown, let’s talk.
We’re here to help you make smart decisions with the full picture in mind.
Simply head over to our Getting Started page to book an introductory call.
Until next time!
