Bond Market Crash: What It Is and How to Prepare
Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
What is a bond market crash?
The bond market comprises corporate and government debt. A rapid decline in bond prices signals a bond market crash. Bonds play a significant role in the global economy, and if the bond market declines or crashes, your investment account will likely feel it in some way. This can be especially concerning for investors with portfolios heavily weighted toward bonds, such as those in or near retirement.
Why did the Treasury bond market crash in 2022 and 2023?
Interest rates and the price of bonds have an inverse relationship. As interest rates go up, the market value (price) of bonds declines. When the Federal Reserve raises the federal funds rate, it can cause the bond market to crash. This happens because new bonds offer higher interest rates than previously issued bonds, and that pushes the prices of older bonds down in the secondary market. For bondholders, this is known as interest rate risk. Rising interest rates in 2022 triggered the Treasury bond market crash that played a significant role in the collapse and sell-off of Silicon Valley Bank in early 2023.
However, if you hold a high-quality bond for its entire duration, you should still receive your initial investment back upon maturity. Interest rate risk most significantly affects bondholders who sell bonds before maturity, especially bonds of longer duration.
NerdWallet rating 4.8 /5 | NerdWallet rating 5.0 /5 | NerdWallet rating 4.6 /5 |
Fees $0 per online equity trade | Fees $0.005 per share; as low as $0.0005 with volume discounts | Fees $0 |
Account minimum $0 | Account minimum $0 | Account minimum $0 |
Promotion None no promotion available at this time | Promotion Exclusive! U.S. residents who open a new IBKR Pro account will receive a 0.25% rate reduction on margin loans. Terms apply. | Promotion Earn up to $10,000 when you transfer your investment portfolio to Public. |
Bond risks
Bonds are generally considered a less-risky complement to the volatility of stocks in an investment portfolio. U.S. Treasurys, and specifically Treasury bills and Treasury notes, are the benchmark for a nearly risk-free investment if held to maturity. As a result, people often look to the 10-year Treasury yield as a barometer of the economy.
But that doesn’t mean that investing in Treasurys or bonds doesn’t come with risks — such as interest rate risk — especially if you plan to sell before the bond's maturity. That’s because bonds are still highly affected by interest rates and the broader economy.
How to prepare for a bond crash
Diversify
Economic shocks are temporary and often unavoidable. Regardless, spreading your investment dollars across different types of investments by diversifying can help reduce the risks associated with any one asset. Owning different types of bonds and bonds of varying durations can also help reduce exposure to interest rate risk.
Buying many bonds bundled together in bond funds is one strategy for quickly and inexpensively diversifying your bond portfolio. For example, short-term bond funds are less likely to be affected by interest rate risk because interest rates typically increase or decrease slowly over months and years. In bonds with shorter durations, there’s simply less time for interest rate risk to take hold.
Long-term investors more than five years away from their goal:
It’s hard (or impossible) to predict a crash. But you can prepare your mindset for how to respond when it happens. Try to avoid selling when the market is down if you can. Remember, when you sell, you lock in your losses. A bond market crash won’t last forever, and you don’t want to lose out when the market rebounds.
Short-term investors nearing their money goal:
Bond crashes can significantly impact investors close to their money goal, such as someone approaching retirement. One financial strategy is to hold a portion of the money you need short-term in investments less likely to be affected by interest rate risk, such as money market funds, high-interest savings accounts, CDs and short-term bond funds.
Next steps
On a similar note...
