Bad markets may not be fun, but they have a lot to teach investors. That’s why Morningstar in October 2024 published new research on the anniversary of the end to arguably the worst US bond market in modern history.
This article summarizes our research on that bad bond market. It details the four big, interrelated risks faced by bond investors who stick to USD-denominated debt: price risk, interest-rate risk, inflation risk, and credit risk. The bond market tumbled so badly prior to October 2023 because three of these latent risks came to the fore, especially in 2022. Understanding the drivers of that drawdown can put investors in a better position to endure future bond market volatility and even to mitigate at least some of these risks.
Price Risk
Industry practitioners often speak as if changes in interest rates, or what investments yield, drive bond prices. The reverse, however, is true: Only bond prices are directly observable in…
