Are bonds done?

In some corners of the investment world, word is bonds are toast.

Truth be told, they have been out of favor for some time. Now, with interest rates on the rise — fueled by resurgent levels of inflation not seen since the 1980s  — investors’ fears are being realized.

The thinking appears to be…

  • Interest rates, which have been near or even at zero, are on the rise.
  • And, of course, when interest rates rise, bond prices fall. If you need to sell, you’ll face a capital loss.
  • The exceptionally low rates over recent years has meant lower and lower levels of interest income for investors from their bonds.
  • As interest rates reached levels near zero, or even below (negative interest rates), there was virtually no income to be had at all. 
  • This has meant hard times for savers and income investors.
  • Inflation, which is bad for bonds, is now in full bloom. 
  • While better interest payments are coming from new bonds, any bonds you hold are destined to fall in value.
  • Of course, barring default, if you hold your bonds until they mature you get your money back.
  • But with inflation, that money now has less buying power. The dollar amount is the same, but the real value as dropped.
  • The massive government spending and the burgeoning national debt of the last decade has begun to drive both interest rates and inflation higher.
  • The idea that this newly resurgent inflation is transitory, is wishful thinking.
  • Little or no income, plus the prospect of capital losses. Not very appealing.
  • Bonds are doomed!

As it happens, I agree with all those points except the last. Yet I continue to hold bonds. 

Here’s why…

Traditionally, bonds are held in a portfolio for the income they generate and, secondarily, as a counter balance to the volatility of stocks. 

Around here, we look at it a bit differently:

  • While juicy fat interest payments are nice, and are key for many who hold bonds, they are not the primary reason to hold bonds on The Simple Path to Wealth.
  • We hold bonds primarily as ballast to smooth the volatile ride of stocks, and to provide “dry powder” when stocks drop and we rebalance our allocation.

Regardless of the interest rates on our bonds, they still serve that primary ballast function well.

But what about all those scary factors listed above? Well, those affect and apply mostly to individual bonds. But we don’t hold those.

We hold our bonds in VBTLX, and that makes all the difference.

Why does holding bonds in a broad-based bond index fund like this one make all the difference?

Glad you asked!

  • VBTLX is Vanguard’s Total Bond Market Index Fund.
  • This means it holds thousands of bonds.
  • These bonds have many different maturities, so some are always coming due.
  • In turn, that means VBTLX has a steady flow of cash with which to buy the new bonds as they are issued.
  • As inflation drives up interest rates, VBTLX will be buying those higher interest paying bonds.

In short, individual bonds carry risks that are largely mitigated by owning them in a broad-based index fund like VBTLX. This is the major reason to avoid individual bonds and own your bonds in an index fund instead. 

While bonds can certainly drop (or gain) in value, they are much less volatile than stocks, especially when held in a broad-based index fund. Just what you want when you go looking for ballast.

If all this has left you confused, don’t feel bad. Bonds are confusing. This post, Bonds, will help you sort it out.



The day after this post went up, AF posted Owning Bonds in a Low Interest Environment. Had I known, I would have asked him for it as a guest post, dropped mine and gone back to my nap.


For years now I have been a fan of Tuft & Needle and they, in turn, have been both an advertiser and now an affiliate partner supporting this blog.

Back around 2014 Daehee, their founder and CEO, reached out to me and offered to send me his new mattress. They were a new company with one product, what they now call their Original Mattress. From the very moment we opened the package and watched it magically inflate, we loved it.

When we bought Kibanda in 2017, there was no question what mattresses we’d have in both bedrooms. But this time we tried their new Mint version, and we got the new Walnut Frame they’d introduced. Here’s that story.

This year they brought out an even fancier version:

The Hybrid

This past July they sent us one to try. Wanting to test it thoroughly before reporting back to you, we slept on it for almost four months until November 1st, when we returned to travel and our nomadic ways.

So what’s the verdict? Another win for T&N!

But that’s no surprise, given my experience with their products and, in some ways, it’s not the important question. That might be…

Which of their three mattresses is best: Original, Mint or Hybrid?

…and that’s a tougher call. While I’ve enjoyed each in turn, I haven’t tested them back-to-back. The current Hybrid is great, as was the Mint. But I also have very fond memories of the Original and would be happy sleeping on it today.

My best advice would be to read the specs, evaluate the price of each and decide what fits your needs best.

It is not like there is a bad choice here, and there is T&N’s very impressive 100-Night Sleep Trial and easy return policy just in case.

Sleep well!


What I’ve been reading…



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Important Resources

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  • Tuft & Needle (T&N) helps me sleep at night. They are a very cool company with a great product. Here’s my review of what we are currently sleeping on: Our Walnut Frame and Mint Mattress.


    • jlcollinsnh says

      Hi Edward…

      That would be true if all the bonds matured in 6.8 years. But that is an average, and the bonds of all the different maturities will have been bought at different times. This means they will be maturing at different times.

      It is not just the short-term bonds that mature first. There will be mid-term and long-term bonds maturing at any given time as well.

      • Markus says

        How about a calculation of the following scenario:
        Interest Rate is going to 5% in the next 2 years and then stays here.
        VBTLX lost 34% (6.8 Duration * 5%) in the two years, but 4% comes in with distributions.
        How long does it take for VBTLX to recover from the 30% loss?

        I will make the first try (but I think my calculations aren’t correct):
        In Year 3, 4, 5, 6, 7 the distribution yield will be 2.5%, 3%, 4%, 4.5%, 5%. That’s 19%, which means after 7 years there is still a 11% loss.
        To the 11% loss you can add any inflation you want over the next seven years.

        Additional, the price value of VBTLX will not recover, because interest rates will not move in this scenario after year two and the average duration stays the same?

    • Grant says

      Yes, that’s true. But it’s a temporary drop in price. As maturing bonds are reinvested at the higher interest rates the loss is recovered by the duration of the fund, and thereafter you are better off than if rates has not gone up. Bond investors should welcome rising interest rates as they mean higher returns in the future.

  1. Mark says

    Hi Jim, I’d add, because the Average Duration of VBTLX is 6.8 years, there is a built in beneficial lag in higher yields to enjoy someday if and when interest rates decline again. Cheers!

  2. Adam Taylor says

    Quite a lengthy average duration of 6.8 years may be a benefit in a decreasing rate environment, but in an inflationary/increasing rate environment, as we now seem to be in, it works against you. You’re going to have to hold those bonds for 6.8 years just to make up for the fall in price that will be suffered if rates were to rise by just 1%. Unlike an individual investor capable of holding single bonds, bond funds will trade bonds to maintain duration and effective maturity – so the price of the bond matters as much as the coupon.

    I respect the advice of JLC, but on this, I think investors looking for dry powder might be better served by holding some cash or money market securities in place of bonds. Inflation is going to find you either way, but at least with cash, the nominal value isn’t going to fall too. On bonds, we should defer to Buffett – “Bonds are not the place to be these days.”

    • John says

      To my novice eyes it appears an indexed bond fund has the benefit of self-cleansing itself in a rising interest rate environment. Does it not also have the advantage, unlike cash, of share price rising in times of high market volatility? If this is true it would seem that the bonds would be a better hedge for “waiting in the weeds” to obtain more stock. Perhaps a 2 year cash bucket in addition to bonds to fortify the ballast position in the portfolio?

      • Adam Taylor says

        Self-cleansing will occur in the sense that new bonds can be bought which may have greater yields, but if bonds are being sold/marked at a capital loss alongside this, I don’t see that as much of an advantage. We can tell from the duration that higher yields aren’t going to offset capital loss unless we hold for 6.8 years. Funds don’t generally have the luxury of a buy and hold strategy, and even when they do the bond prices are still marked to market. If rates rise, especially if they continue to rise, you are going to get slaughtered in any intermediate to long term bond fund.

        Bond funds might gain in periods of high volatility, but they may also fall. In a true panic, most assets tend to correlate towards one!

        I agree with all the advice JL gives on equities, it’s a fool’s errand trying to time the market. But bonds aren’t equities, you only have to consider credit risk and the discount rate. If we assume credit risk can be diversified away, we only have to take a view on interest rates. My view, a common one, is that rates will rise from here which makes bonds a bad place to be.

        Don’t listen to me on this – listen to Buffett.

        • Frankie says

          So why don’t we just put the dry powder in vanguards short term bond fund VGSH. Is it not just a basket of short term bonds? In doing so you would avoid the intermediate and long term bond exposure from the total bond market fund. Would this not be more favorable in a rising interest rate environment?

          • Adam Taylor says

            Yes, I think it would. Taking steps like this to reduce duration is a sensible step, in my opinion. But even short-term funds can/will fall when interest rates rise, as has been proven true over the last month. I see very little upside to any bonds.

          • Grant says

            The best predictor of interest rates is the yield curve, so that for you to do better than the the bond market by going to short term bonds, rates would have to rise more than expected. Not likely to be the case. Besides we don’t know we are in a rising interest rate environment. The experts have being saying that for years. For the long term investor you are better off in a total market bond fund and forget about trying to predict interest rates.

    • Grant says

      I disagree. Cash doesn’t rise in price like bonds do in a market crash – just the time you need money to rebalance into stocks. Bonds are a better diversifier of equity risk than cash for this reason.

      • Adam Taylor says

        The correlation between bonds gaining in price when equities fall has been strong for 40 years or so, but it hasn’t always been this way. Interest rates have been falling for the last 40 years and real rates are now firmly negative! I am investing on a 20-40 year time frame and on this horizon I don’t think this trend stands any chance of continuing.

  3. Robert - Stop Ironing Shirts says

    I agree, bonds aren’t dead at all.

    I prefer to buy individual treasuries at this point in the credit cycle. I’m not being paid much of a premium to take the credit risk of private company bonds and a fund presents the risk of a permanent loss of capital if we get a slow and prolonged rise in interest rates, even if I don’t think the latter is really at risk of happening.

    I put $10,000 into a 10yr treasury bond, I know I’m getting interest and my $10,000 back at the end of the bond term. If we do need to reallocate during a market panic, I will also get some appreciation when everyone scrambling on margin calls with drive up the demand for treasuries.

    Keep up the good work

  4. Tim says

    What is your opinion on using VIPSX for this rebalancing ballast instead of VBTLX. I made that switch earlier this summer due to concern with impending inflation. Seems to have played out well thus far.

    Looking forward to the new book!

    • Herbert says

      I did as well. I was going to ask the same question. VTAPX or VAIPX, or the ETF VTIP would all be in this same basket.

      Buying 10k of US Series I Bonds also would also seem to be prudent. And another 10k for the spouse.

    • jlcollinsnh says

      Thanks Tim…

      …it should be out shortly.

      VIPSX, and the funds Herbert mentions, are good choices in an inflationary/rising rate environment.

      As it happens, my best guess is that’s where we are headed. Problem is, that is only a guess. The future has a way of fooling us.

      Few things are less predictable than the short-term direction of the stock market. But interest rates are even less predictable. Notoriously so.

      So while I, and the rest of the world it seems, think rates are headed up and inflation is here to stay…
      …we could be wrong.

      As mentioned above, VBTLX works both ways.

      • Adam Taylor says

        I have to respectfully disagree; I would argue that interest rates are more predictable. We are regularly given dot plots of the intended direction and the fed is constantly signalling in other ways too. Clearly, nothing is certain, but 10-year real yields have only briefly been lower than they are now, during the two oil spikes more than four decades ago; and the fed funds rate has never before been this low. From any reasonable medium to long-term perspective the direction of overall travel for rates looks overwhelmingly likely to be up.

        • jlcollinsnh says

          You are probably right, Adam…

          …and my best guess is also that they are on the way up.

          Problem is, I’ve spent the last 40 years being told rates had bottomed and could only go up from here. Wherever “here” happened to be at the moment. 🙂

          • Rui Guerreiro says

            And this is also quite obvious…! If somebody says they would have guessed negative interest rates they would be lying. And that’s really the point: we have absolutely no way to guess where or better “when” they market is going up or down!

  5. WorldFIRE says

    While I agree, if the bond portion of the portfolio is for dry powder only, why not leave it in the SCHP for instance. It’s TIPs, inflation protected, better yield and it appears safer than VBTLX. Also, why not very short term interest rate such as JPST? If dry powder is the main objective of bonds, these seem to make more sense to hold than a total market bond.

  6. Richard J says

    If you want to know the ETF equivalent of VBTLX, it’s BND on Vanguard, IUSB on BlackRock iShares, SCHZ on Schwab, FBND at Fidelity.

    If you use portfoliovizualizer you’ll see that FBND and IUSB are better performers.

  7. BH3 says

    Mr. Collins, What’s your thoughts regarding holding the G Fund instead of VBTLX? If ballast is the goal wouldn’t the G Fund be a better option if one has access to the fund?

    • jlcollinsnh says

      I am a fan of the TSP plans the government offers its employees, but the G-fund is short-term treasuries. Because I can’t be sure what direction interest rates will go, I prefer a broader based bond fund. That would be the F-fund I believe.

  8. DrKale says

    Dear Mr. Collins,

    Let’s say M2 growth is 12% and bonds pay 1.5% pre-tax. You’re losing 10.5% of purchasing power pre-tax, unless you’re willing to say there’s sub 10% inflation because you’re moving from rib eyes to burgers to soy to insect patties, in which case, yes, inflation is low if you change your protein source and use CPI rather than M2 growth.

    Are bonds still worthwhile in this situation?

    Also, what about insolvency risk? The US has a history of defaulting on their promises, 1971 (cancelled gold payments to France), 1933 (seizing gold), 1913 (changing of currency), etc.

  9. Ulfilas says

    I’m not at the stage of buying bonds yet, but I do wonder if a low-cost active bond fund might be a better option? Especially here in New Zealand where we have quite a small market, the main Government Bond Index has tanked in comparison with most active bond funds.

    I’ve read some discussion elsewhere of combining passive strategies for equities with active management for bonds (as long as it’s low-cost). Any thoughts on that?

    • Grant says

      Not a good idea. The data shows that active managers are no better at bond picking and divining interest rates than they are at stock picking and market timing. I’d stick to bond index funds,

  10. Kaye says

    Hello Mr. Collins,

    Sorry to leave a comment, I wasn’t able to find an email address to reach out to you directly. I’m a book scout and one of my international clients is interested in translating and publishing your book in their territory. If you’d like to discuss this more, please email me back — you’ll find my address on our website.

    Have a great day!

  11. Denise says

    I bought I Bonds bc I had 30K sitting in the bank at .5% interest. Seemed like a better place to park shorter term savings and emergency fund. So I dropped 10K on I Bonds. Not part of my “investments,” but just a place to park some cash in case I need it. Not sure where else to put emergency money, since every bank and CD is offering way less than 1%.

  12. Fred says

    The entire world is saying interest rates will go up up up.

    And yet.

    The big money in the market is predicting transient inflation.

    Who’s right?

    I don’t know. I never know.

    Better to set a reasonable asset allocation and let the allocation do it’s magic. Yes, my bet would be that my bond index funds lose value over the next year. Maybe my stocks will as well. But I don’t know what will happen and surely I’d be far richer if I did.

    I was sure that when the S&P500 hit 3700 after the covid recovery that we were at a near term top. Glad I didn’t bet on that “hunch” because it looks stupid in the rearview mirror.

    If you want to be wealthy, set it and forget it.

    • Ulfilas says

      Thanks for that link Marcus.

      It also provides some support for my leaning towards a low-cost actively managed bond fund.

  13. Arshid Mahmood says

    Hi JL Collins,

    I have been reading and listening to your stuff about 5 hours a day for the last week or so. It amazing to have someone like you. I had few questions please and i would be delighted if you or someone else can help:

    1. Bitcoin has recently raised a question mark about how valuable the dollar and other currencies will be in the future. Is it possible that something similar can happen to the stock market, which decentralises it and consequently, the index funds which rely on the stock market is no longer “something that always goes up”? I’m thinking of a situation in which stocks are no longer sold at Wall Street.
    2. ETF appear to be the way for me, as I live in the UK and I can contribute towards them every month. How is the price of an ETF calculated? What happens if the US market continues to grow, but ETF become less popular. Will that mean the ETF will not rise as much, because it is depended on supply and demand?
    3. I feel Quantitative Easing has also played a role in the growth of stock. If Quantitative Tightening happens (if that is possible), is there not an argument that the stock market may not continue to go up?

    Happy for anyone else to give their comments on this one also please.

    Kind regards
    Arshid Mahmood

    • Fred says

      Arshid, A few thoughts from someone who isn’t JL:

      1) Bitcoin, or any other cryptocurrency for that matter, is not the first to raise the question about the value of a currency. Indeed, the US and other countries are constantly working to ensure their currencies retain value against other world currencies. The Federal Reserve Bank in the US is responsible for monitoring monetary policy. Cryptocurrencies may survive — I suspect ultimately based on whether their individual governance models are competitive or not — but I don’t think they alone raised the issue of fiat currency value de novo. In other words — the Fed is worried about US currency regardless.

      2) The price of an ETF is calculated on supply and demand like any other stock/bond BUT there is an additional arbitrage function that market makers can perform, as follows: A market maker can purchase the stocks of the companies that make up the ETF basket and can exchange them for the requisite number of shares of the ETF. In this way, if distortions between the aggregate price of the ETF and the underlying shares becomes apparent, a market maker will see an opportunity to make a small amount of money on arbitrage and will execute one of these stock-for-ETF trades. As a result, over the long run, ETFs track their underlying stock funds accurately. But – because there can be very short term distortions, I never buy/sell my shares on days with sharp volatility. You can look this up and find lots of articles on how ETFs are priced.

      3) Certainly the Federal Reserve, or any central bank, can tighten their monetary policy which can have an effect on short-term stock prices. But JL and his followers (me included) ignore these effects. We’re interested in owning the underlying businesses that make up the index (the “beer” as JL calls it in The Simple Path to Wealth, as opposed to the “foam” which is the furious price movements that happen all the time). But yes, there WILL be a crash at some point. The problem is: none of knows exactly when.

      • Arshid Mahmood says

        Dear Fred,

        thank you very much for explaining point 2 and 3 very well. I will most definitely follow what you suggested, like JL.

        Can I pick your brains on point 1 again please. Perhaps I could have explained my question slightly better. Say tomorrow, like Bitcoin, there is a new entity called “Meta.” Meta is a thing where companies are able to list and sell their stocks, just like we currently do on NYSE. How would that situation impact the index fund strategy that JL Collins advocates?

        For the purposes of this point, by Meta I don’t mean Facebook, just something new that could come about one day like Bitcoin did.

        Kind regards
        Arshid Mahmood

        • Fred says

          On #1 > Good question and actually one I’ve been thinking about because obviously new currencies imply almost an international-style allocation. I will tell you that right now, the entire concept of the crypto world is so new I don’t think we know for sure *how* that will long-term impact an indexing type strategy, but for today, it falls into the “speculative bucket” and therefore I, for the most part, ignore it. Crypto is basically a fiat currency issued by the collective consciousness of the people who subscribe to that crypto… It floats against the USD based on how strong of a currency it is, and so far, that seems to move around very very fast. It’s just too rich for my blood at this point.

  14. Michael says

    I am grateful that JL Collins published this post.

    It was in fact the compelling replies of the readership that I found most convincing and therefore ended up reducing duration, in finally making the switch from BND [Vanguard Medium-Term Bond ETF] to BSV [Vanguard Short-Term Bond ETF].

    Underlying fund duration now more closely aligned to expected holding period. Very happy to take the hit to yield instead of potentially to principal given my investment objectives. Thanks to all who replied.

  15. Greg says

    According to Business Insider, compared with last year, inflation is up 6%, wages are up 12%, and corporate profits are up 37%. Oh, and the S&P 500 is up 41%. I’m not surprised that some investors are looking at their bonds and asking, “Why do we hold these again?” Which question I’m sure they’ll be able to answer the next time the stock market drops 10%.

  16. Jon says

    love your book and just came across your website which is super great.
    I have a question regarding bonds: would you consider adding 20% bond etf if you were in the accumulating phase? would love to hear your pros and cons.

    I’m currently on 100% stocks – international etf that covers basically the whole world and I’m thinking of switching to 80%-20% portfolio to derisk and to be able to balance on stock crash.

  17. far_wide says

    Reading this post here in March 2022, well it certainly puts one’s bond appetite to the test. VBTLX is down 12% nominal so what, 20% real? Also, we can look at Greg’s comment above about being thankful for bonds when stocks fall 10% and say “well, they just did, and in that time bonds were down 5% themselves. We’d have been better off in cash”….

    I’m not here to try and say bonds are useless though, quite the opposite in fact, I’m wondering whether now might be one of the best times of late to actually deploy them. I have no idea how much further they could go down, but if this was stocks, we’d already be in a bear market on the long duration front.

    Can we now not only talk about a hedge for equities but also a much improving Yield to Maturity? We’re certainly getting to interesting territory, even if that means still losing to eye-watering inflation.

  18. Ag says

    I would be interested in peoples thoughts,
    I have typically used my bond fund to to buy shares when they dip.

    Obviously in the current economic state both bonds and shares have fallen
    Currently shares have fallen more than bonds!
    Does it still make sense to lock in bond losses to buy shares with the expectation that when shares recover you will make greater gains and recoup mare than you lost with selling the bonds

    • jlcollinsnh says

      Hi Ag…

      This is a thorny question and one I have been thinking about for my own accounts.

      In the current high-inflation environment both bonds and stocks are going down hand-in-hand and, as you observe, bonds are falling a bit less.

      If you sell bond shares to buy stock shares you are getting the lower price on both and so you have to make a judgement call.

      Assuming both are in taxable accounts, those bond share losses give you a capital loss to offset future gains and up to $3000 per year in earned income. Any unused loss can be carried forward to future years. So, that’s something.

  19. Sarah says

    Losing more in bonds this year than in stocks. I should’ve listened the street on this one. Jl was wrong

    • Grant says

      You must be buying some crazy risky bonds. The bond market it down 11.5% and the US market is down more than twice that, down 23.9%. As expected bonds continue to be a good diversifier of equity risk.

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