The Bond Market Is Healing — And Nobody’s Paying Attention

That was June 2007.

Most people don’t even remember Brookstreet. But Bear Stearns went down the next year, followed by Lehman and then a host of other firms. The subprime mortgage mess was the first domino in the Great Financial Crisis.

I tell you all this not because it’s ancient history, and not just because I enjoy frightening new interns, but because I’m watching something happen right now that reminds me of 2007 — except in reverse.

The Financial Crisis Damaged Investor Trust

People trusted the bond market too much in 2007. Today, they don’t trust it enough.

The MOVE Index, the bond market’s fear gauge, has hovered around 63 recently. That’s a 55% decline from its 52-week high. Investment-grade corporate bond spreads are near 75 basis points, a level tighter than 98% of the past 20 years. At roughly 5%, IG corporate yields offer solid compensation for credit risk.

Low risk combined with high yield would normally be incredibly attractive to investors. Yet they continue to shun fixed income.

Why?

The reason is the same thing that drove bad decisions in 2007 — a fear-induced disconnect between what the data says and what the gut feels.

The Hesitant Investor

I know from my 30 years on institutional fixed income trading desks that the state of an asset class can be judged by how retail investors behave relative to what the data says.

The pattern is always the same. Whether at Lehman Brothers, Fidelity, or Tradeweb, the story is consistent: Retail investors cling to cash after bonds get clobbered. And they take forever to move back into the market after bonds stop falling.

Now, as I teach fixed income at a university, speak at advisor conferences, and write a weekly newsletter for financial advisors, I get variations of the same story every week.

The client has been sitting in cash for two years. The advisor is trying to get them into bonds, but the client has conditions:

• “I’ll move when the Fed stops hiking.”
• “Let me see how the economy holds up.”
• “I want volatility to come down.”
• “I want to see spreads tighten.”

Every one of those conditions has been met, yet the client is still sitting in cash.

Still a Scary Situation

Liquidity becomes the highest priority after bonds get crushed. That’s human nature.

From January t0 December 2022, the Bloomberg Aggregate Total Return Index lost over 13%. After two decades of being the thing in the portfolio that didn’t go down, bonds went down. Hard.

Something that takes out both bulls and bears every decade or so is going to break a few hearts. And on top of it, cash is now paying 4.5%. There’s no drama there, and it’s very hard to argue with zero drama.

I’ve been there. I know why it hurts to climb back in after AAA-rated paper turns to garbage overnight.

Investors Are Missing Out

But when clients sit in cash, they’re really betting that short-term rates stay high forever. They’re risking real yield while chasing something that doesn’t exist on frothy valuations stuck in a sideways trading range — capital appreciation.

This is reinvestment risk. For a majority of retail clients, it is the most underappreciated concept in fixed income investing. It is also the one thing you can count on: The rate of return on rolling cash is almost always lower than the yield offered by laddered intermediate-maturity bonds.

There have been periods over the past two decades when clients sat in cash for four years. During the big muni boom, some sat in cash for five. Never mind the yield differential. The net value of idle cash, as measured by reinvestment risk, means these clients lost out on compounding interest streams even when the initial investment amounts were the same.

We’re in one of those periods right now, characterized by low risk, solid yield, and stable markets.

Clients who sit too long on the sidelines don’t blow up. But they definitely lose out. They miss being paid good money for relatively low risk.

I haven’t yet come across a client who blew up making this kind of bet. But I’ve seen plenty who allowed fear to make them forget what they’re giving up: the potential to earn reliably attractive returns during the bond market’s very best opportunities.

For 30 years I’ve spent most of my energy teaching advisors how to get retail clients to open their eyes. Get them out of the spreadsheets. Get them to face reality. Get them to take risk off the table first before moving on to higher-reward, actively managed alternatives. I consider these things the foundation of the client advisory relationship.

When the Opportunity Is in Front of You

I know what it sounds like when the bond market breaks. I was there for the 4 a.m. call. I also know what it looks like when the bond market offers something genuinely good.

It rarely happens. And when it does, you need to grab it with both hands and not let go until it’s gone — the next opportunity could be a very long time from now. Yield levels of this magnitude don’t come along often.

In 2007, clients were badly burned after trusting the bond market too much. But in 2026, clients are letting a good opportunity pass because their last experience was too painful. They can’t bring themselves to trust the bond market, even for what may turn out to be a relatively short window of several months.

Right now, the bond market offers low volatility in government debt markets, stable credit conditions, and healthy yields near 5% on investment-grade corporate paper with excellent credit quality. It rarely gets much better than this.

Charles Urquhart, CFA, is the founder of Fixed Income Resources and an adjunct professor of fixed income at Loyola University Maryland’s Sellinger School of Business. He spent 30 years on institutional fixed income trading desks including Lehman Brothers, Fidelity Investments, and Tradeweb.

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