Defensive Isn’t Dead Money: The Role of Bonds and Treasuries in a Higher-Rate World

Bond investors got the shock of a lifetime in 2022, suffering perhaps the worst year in history. The Bloomberg US Aggregate Bond index, for example, fell an unprecedented 13%. The financial press started using scary terms like “bond crash” and “bond panic.”

For investors who’d bought bonds to provide stability to their portfolios—and got just the opposite—it seemed a good idea to swear them off for good.

That would have been a mistake. Bonds rallied in 2023 and went on to perform well in 2024 and 2025. Looking back, 2022 didn’t herald a new normal for fixed-income investments. Bonds still play an essential role in a well-balanced portfolio.

What Went Wrong in 2022

Surging inflation and rising interest rates delivered a one-two punch to the investment markets in 2022.

Inflation was driven by several rare events, including the supply chain disruption brought on by the COVID-19 pandemic, which made many products more expensive. Government stimulus programs intended to relieve some of the pressure on consumers and businesses pumped more money into the economy, also causing prices to rise. Inflation peaked in June 2022 at 9%.

Then, in trying to bring down inflation, the Federal Reserve raised interest rates seven times during the year, ratcheting rates steadily upward from 0.25% to 4.5% by year’s end.

As interest rates rose, so did the rates paid on newly issued bonds, making existing bonds less valuable. Older long-term bonds were hit hardest of all, because they lock investors’ money in for a greater period of time. Prices on 20-year Treasuries fell a stunning 29%.

When Bonds Actually Work Best

Bonds may never generate the same excitement as stocks—and that can be a good thing, especially in years when stocks take a major and sustained dip. In general, stocks and bonds have an inverse relationship, with bonds performing well when stocks are doing poorly and vice versa. This isn’t always the case, however, as 2022 demonstrated.

Bonds tend to prove their worth in certain economic environments, something economists refer to as “regime dependent.”

• Recessions: During the Great Recession of 2007-2009, for example, high-quality bonds soared while stocks sank. The Dow Jones Industrial Average fell 54%, but 10-year U.S. Treasuries gained 10.2% in 2007 and another 20.1% in 2008.
• Deflationary environments: Deflation, when prices experience a sustained decline, is far rarer than inflation. But when it happens, bonds stand to gain because the income they produce becomes more valuable and will buy more goods and services.
• Flight-to-safety scenarios. When stocks are being battered by things like geopolitical worries and investors are looking for a place to move their money or park new funds, high-quality bonds are often their destination of choice.

Treasuries as a Hedge

U.S. Treasury securities are considered the ultimate safe harbor by investors all over the world. Some refer to them as risk-off assets, meaning securities that hold up when other assets seem too risky or during periods of economic uncertainty. Treasuries serve as a hedge against falling stock prices in a portfolio consisting largely of stocks.

Not all bonds are risk-off assets. High-yield debt, also known as junk bonds, and other issues of low credit quality are considered risk-on because of higher default rates. Treasuries are also more liquid than some other types of bonds—an advantage for investors who want to sell quickly if they have to.

Income Is Back

The steady rise in interest rates starting in early 2022 has pushed yields on new bonds steadily higher in the ensuing years. The 30-year Treasury rate rose past 3.5% toward the end of that year and, as of May 2026, sits around 4.9%.

The increase has made income, rather than price appreciation, the main lure for bonds lately. Retirees, especially, have often gravitated to bonds as a source of income for everyday living expenses, something that was impossible to achieve back in the days of paltry 0.25% yields.

Using Bond ETFs Strategically

One convenient and low-cost way to invest in bonds is through an exchange-traded fund (ETF). ETFs are available for a spectrum of bond types and combinations, with each serving a particular purpose.

Treasury ETFs offer what is normally the safest of all fixed-income investments. Treasuries come in a range of maturities. Bills have maturities of four to 52 weeks, and generally the lowest yields. They are less susceptible to severe price declines when rates are rising. Treasury bonds have maturities of 20 or 30 years and have the opposite profile. Treasury notes with maturities of two to 10 years fall in between.

Corporate bond ETFs consist of a portfolio of corporate bonds chosen according to that ETF’s investment goals. Their portfolios may differ in terms of their holdings’ average maturities, credit risk, and other variables.

Typically, longer maturities correlate with higher yields but also greater risk of declining values when rates are rising. Credit quality can also affect yields, with higher quality bonds, also known as investment grade, offering lower yields along with a lower risk of default. At the lowest end of the risk continuum, junk bonds must pay significantly higher yields to compensate investors for their added risk.

Short-duration ETFs can be useful for investors looking for a relatively low-risk, temporary parking place. Technically, duration is a measure of a bond’s sensitivity to changes in interest rates, which takes into account its term, or length of time until it matures. Short-term bonds, being less sensitive to interest rate changes, will also have shorter durations.

These ETFs usually consist of Treasury securities and high-quality corporate bonds with terms under five years. Ultrashort bond funds hold securities that mature in a year or less.

TIPS ETFs are portfolios of Treasury Inflation-Protected Securities. In contrast to other Treasury securities, their principal amount and interest payments will increase along with inflation rather than being fixed from the outset.

TIPS come in terms of five, 10, or 30 years, and ETFs focused on them are most suitable for investors who are concerned about future inflation and willing to accept a somewhat lower interest rate initially in return for a hedge against it.

The Bottom Line

Despite having a bumpy year in 2022, bonds remain an important part of a properly diversified investment portfolio. Their relatively high interest rates in recent years have made them an attractive prospect for investors seeking a reliable source of income. 

ETFs are a convenient way to buy bonds and have the added benefit of being diversified themselves for greater protection than individual bonds.