Bond basics.
What BND actually is.
Most investors hold bonds without knowing what bonds are or how they behave. The 2022 surprise (BND down approximately 13% in a single year) was not a freak event; it was durationdurationA measure of how sensitive a bond price is to interest rate changes. A bond with 10-year duration falls roughly 10% in price when rates rise 1 percentage point. Longer duration = more interest rate risk. risk doing exactly what it does when rates rise sharply. This page covers what bonds are, why they're in a portfolio, and how to pick the right kind.
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A bond is a loan. The borrower pays interest for a fixed term, then returns the principal. When market interest rates rise, existing bonds (paying old lower rates) become less attractive, and their prices fall. The longer the bond's term (its "duration"), the more its price moves. Bonds belong in a portfolio for stability and rebalancingrebalancingBuying and selling assets to restore your target portfolio split after market movements cause drift.Full definition dry powder, not for return. Match the duration to your time horizon.
What bonds are
A bond is a contractual loan. The issuer (a government or corporation) borrows money, agrees to pay interest at a fixed rate for a specified term, and returns the principal at maturity. A 10-year US Treasury bond at 4% pays the holder 4% per year for 10 years, then returns the principal.
Bond funds (BND, AGG, FXNAX) hold thousands of bonds and trade like stocks. The fund's value changes daily as the underlying bonds' prices change.
Duration: the only number that really matters
When market interest rates rise, the price of existing bonds (paying lower coupons) falls. The reverse: when rates fall, existing bonds (paying higher coupons) become more valuable, prices rise. Duration measures how much a bond's price changes for a 1 percentage point rate change.
Price change ≈ -duration × rate change. A bond with duration 6 falls roughly 6% in price when rates rise 1 percentage point.
BND has duration around 6 years. Long-bond funds (TLT, EDV) have duration around 18 to 20 years. Short-bond funds (VGSH, BSV) have duration around 2 years. The trade-off is yield (longer = higher) for price volatility (longer = much higher).
The 2022 lesson
The 10-year Treasury yield rose roughly 4 percentage points across 2022 as the Fed tightened to fight inflationinflationA general increase in prices over time, meaning each dollar buys less than it did before.Full definition. BND fell approximately 13% on a total-return basis, its worst calendar year on record verify×DON'T TRUST, VERIFYClaim: Vanguard's BND fell approximately 13% in 2022, its worst calendar year on record.Verify at: Vanguard BND fund page (annual returns) ↗The Bloomberg US Aggregate index, which BND tracks, had its worst year in the modern data record.. This surprised many investors who assumed bond funds were a safe haven. They are safe from credit riskcredit riskThe risk that a bond issuer fails to make promised interest or principal payments. Treasury bonds carry essentially no credit risk; high-yield corporate bonds carry meaningful credit risk in exchange for higher yields. (the US Treasury will pay). They are not safe from duration risk.
The lesson: knowing the duration of any bond fund before adding it is the practical takeaway. The "safe" portion of a portfolio is only safe in dimensions you understand.
Why bonds in a portfolio at all
Bonds belong in a portfolio for three reasons:
- Lower volatility. The total portfolio's swings are smaller, which makes it easier to stay invested through equity drawdowns.
- Rebalancing dry powder. When equities crash 30%, you sell bonds (which are usually steady or up) to buy equities at low prices. Without bonds, you have nothing to deploy.
- Specific cash needs. Money needed within 3 to 5 years should not sit in equities. Short-duration bonds or cash-equivalents are the home for it.
Bonds do not belong in a portfolio for return. Long-run real bond returns have been roughly 1 to 2% above inflation. The portfolio's growth engine is equities; bonds are the brake.
Bond fund options by use case
- Money you need in 1 to 3 years: Short-term bond fund (VGSH, BSV) or money market fund (SPAXX, FZFXX). Limited rate sensitivity.
- Bond portion of a long-term portfolio: Total bond market (BND, AGG, FXNAX), duration ~6 years. The default Boglehead pick.
- Inflation protection: TIPS funds (SCHP, VTIP) or I Bonds. The principal adjusts with CPIConsumer Price Index (CPI)The government's measure of how much a typical basket of consumer goods costs over time.Full definition.
- Tax-deferred only (401k, IRAIndividual Retirement Account (IRA)A personal retirement savings account with tax advantages. Two main types: Traditional (tax now, pay later) and Roth (pay now, tax-free forever).Full definition): Total bond market is fine. The interest is taxed as ordinary income, so it's most efficient to hold in tax-deferred accounts.
- Taxable accounts at high brackets: Municipal bond funds (VTEAX, VTEB) for federal tax exemption.
What this changes for tomorrow
- Look up the duration of any bond fund you own. If you didn't know it, now you do.
- If you have money you need within 3 years sitting in a long-bond fund, that's a duration mismatch. Move to short-bond or money-market.
- If you're using bonds as a portfolio brake, the standard total-bond fund (BND/AGG/FXNAX) is the consensus default.
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Last updated 2026-05-01. Not financial advice.
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