With so many macroeconomic issues in the air as we enter 2022, there's no singular blueprint for how to invest in the new year. Thus, the best bond funds for 2022 could look very different from one investor to the next depending on their goals, account and risk tolerance.
For example, if you're dollar-cost averaging into a bond mutual fund in your 401(k) plan throughout the entire year, a passively managed core bond index fund could work well, especially if prices fall alongside rising rates.
But then, if you're wanting to front-load a fund early in the year, a Treasury inflation-protected securities (TIPS) fund could work better than a core bond index fund – especially as inflation concerns are likely to be more pronounced earlier on and potentially subside as the year progresses.
Many of the investment themes that are likely to impact bond funds in 2022 should be the same as those that will challenge equity markets. Several, such as inflation and rising rates, appeared to be priced into bonds by the end of 2021, but there still are other uncertainties to consider. For example, the omicron variant of COVID-19 could be worse than expected, or Chinese-U.S. relations could change.
As for interest rates, the bond market should respond as usual: no big move up or down unless there's a surprise. For example, the Fed's decision in late 2021 to remove the word "transitory" from its inflation narrative underscores the persistence of inflation and the threat of a faster-than-expected taper on the Fed's bond-market purchases, as well as higher rates coming earlier in the year.
While investors shouldn't expect any big positives for the fixed-income market in the coming year, the best bond funds for 2022 will offer the potential to minimize the downside of falling prices amidst rising rates and inflation. They'll also help squeeze out any potential upside there is to capture.
Read on as we outline our seven best bond funds for retirement savers in 2022. These bond mutual funds span seven different categories to help investors of all stripes find the right product for their portfolio.
Data is as of Dec. 16. SEC yields reflect the interest earned after deducting fund expenses for the most recent 30-day period and are a standard measure for bond and preferred-stock funds.
Fidelity Floating Rate High Income Fund
- Fund category: Bank loan
- Assets under management: $11.1 billion
- SEC yield: 3.1%
- Expenses: 0.68%
Fidelity Floating Rate High Income Fund (FFRHX (opens in new tab), $9.48) could be one of the best bond funds for 2022 because of its exposure to bank loans that have fluctuating rates.
When interest rates are rising, prices tend to fall on many fixed-rate investments. But a certain category of bank loans, called floating-rate debt securities, can perform relatively well compared to other loan types in a rising-rate environment. This is because a floating-rate bond's coupon rates change when market rates change, which means its prices will normally fluctuate less than fixed-rate bonds of similar maturity.
The FFRHX portfolio focuses on institutional floating-rate loans and debt securities that have credit ratings that are below investment grade (in other words, "junk."). Currently, 90.1% of the fund's portfolio is BB-rated or lower.
While this can help to provide greater returns and higher yields compared to bonds in the aggregate, the credit risk is higher. Still, at the moment, a recessionary environment still seems unlikely for 2022, and thus there's not much risk of default in the coming year.
Learn more about FFRHX at the Fidelity provider site. (opens in new tab)
T. Rowe Price Global Multi-Sector Bond Fund
- Fund category: World bond – USD hedged
- Assets under management: $1.8 billion
- SEC yield: 2.9%
- Expenses: 0.64%
T. Rowe Price Global Multi-Sector Bond Fund (PRSNX (opens in new tab), $11.55) makes our cut for one of the best bond funds for 2022 because of its actively managed, "go anywhere" style that provides shareholders with far-reaching opportunities.
When yields are low and the prices for domestic bonds are looking to be under pressure in 2022, active management with broad diversity and the potential for high yields looks attractive. PRSNX pays off on all fronts in this regard, albeit with higher risk from lower credit-quality bonds.
With a 30-day SEC yield of 2.9% and 12-month return of 0.89% through Nov. 30, 2021, PRSNX was well ahead of the iShares Core U.S. Aggregate Bond ETF (AGG (opens in new tab)) yield of 1.5% and 12-month return of -1.33%. And 2022 is not likely to look too different from 2021 with regard to low yields and low- to below-zero returns for funds that hold U.S. bonds.
Slightly more than half of PRSNX's portfolio is invested in foreign debt instruments, with most of the rest in U.S. bonds, and convertible debt making up a tiny remaining sliver. Most of its bonds are government and corporate debt, and mortgage-backed and asset-backed securities.
Included in its top 10 issuers (outside the U.S.), which make up 33% of the portfolio's holdings, are Germany, China, Chile and Hungary.
Learn more about PRSNX at the T. Rowe Price provider site. (opens in new tab)
Vanguard High-Yield Tax-Exempt Fund
- Fund category: Muni national long
- Assets under management: $19.1 billion
- SEC yield: 1.5%
- Expenses: 0.17%
Vanguard High-Yield Tax-Exempt Fund (VWAHX (opens in new tab), $12.08) is a bond fund that seeks high current income that is exempt from federal income tax. This makes it a top-flight idea for investors looking for tax-free income from bonds held in a taxable brokerage account.
The SEC yield of 1.5% might not sound great, but remember: That income is tax-free. The "tax-equivalent" yield – the yield you would have to get on a taxable product to equal the same take-home income as VWAHX – is 2.4% for those in the highest tax bracket.
Beyond the tax benefits, what makes VWAHX a potential winner for 2022 is that it invests up to 80% of its assets in investment-grade municipal bonds. These can achieve higher yields and potentially greater returns in a rising-interest-rate environment compared to higher-quality corporate bonds and Treasuries, which are commonly found in aggregate bond index funds.
Although investment-grade municipal bonds may have lower credit ratings, thus higher default risk, compared to a mix of corporates and U.S. Treasuries, the greater risk for fixed income in 2022 will likely be interest-rate risk, not default risk. That said, 79% of the portfolio has credit ratings of BBB or better, so credit quality is not an issue here.
VWAHX looks well-positioned to be one of the best bond funds to hold in 2022 period, but especially for investors with a taxable brokerage account who can effectively put this tax break to work.
Learn more about VWAHX at the Vanguard provider site. (opens in new tab)
Fidelity Investment Grade Bond Fund
- Fund category: Intermediate core bond
- Assets under management: $10.1 billion
- SEC yield: 1.4%
- Expenses: 0.45%
Fidelity Investment Grade Bond Fund (FBNDX (opens in new tab), $8.39) is one of the best actively managed core bond funds on the market, which is how it earned a place among the best bond funds for 2022.
A rising-rate environment is arguably one that is best suited for active management. This is because rising rates generally push down bond prices, especially those with longer maturities. So, active managers can navigate this kind of challenging rate environment, potentially better than passive funds that are bound to hold bonds that are in the index.
For example, an active manager can shorten maturities or add lower-credit-quality bonds to protect against interest-rate risk while capturing higher yields. Passive managers are just stuck with whatever is in the benchmark index.
As for FBNDX, shareholders get seasoned lead manager, Jeff Moore, who has been at the helm of the bond fund for over 17 years.
While it's true that the current yield isn't much larger than the S&P 500's at present (1.3%), capital preservation – which you get through these investment-grade bonds – is also important to investors.
And for a quick check on performance: FBNDX's returns have beaten those of the Bloomberg U.S. Aggregate Bond Index over the trailing one-, three- , five- and 10-year time frames.
Learn more about FBNDX at the Fidelity provider site. (opens in new tab)
Vanguard Ultra-Short-Term Bond Fund
- Fund category: Ultrashort bond
- Assets under management: $21.5 billion
- SEC yield: 0.5%
- Expenses: 0.20%
Vanguard Ultra-Short-Term Bond Fund (VUBFX (opens in new tab), $10.03) can be one of 2022's best bond funds for investors who want to get more yield than a money market account, while stepping down the interest-rate risk inherent in bond funds with a longer average duration.
Average money market rates were sitting at 0.07% in December 2021. Yields for the trailing 12 months were even lower. Compare that to the 0.5% yield, as of mid-December 2021, for VUBFX.
One large caveat to keep in mind for investors who are considering a jump from a money market account to an ultra-short-term bond fund is that the latter does carry some interest-rate risk. In other words, prices can come down when rates rise. But for reference on VUBFX, the 12-month return through Nov. 30, 2021, was 0.25%.
While past performance is no guarantee of future results, 2022 could be similar for VUBFX, in that it can outperform money market rates – and potentially beat the returns of the riskier intermediate- and long-term bond funds.
To get an idea of what's in Vanguard Ultra-Short-Term Bond, the portfolio provides exposure to money market instruments and high-quality short-term bonds, as well as asset-backed, government, and investment-grade corporate securities. The fund typically will invest 80% of its assets in fixed-income securities, and maintains a dollar-weighted average maturity of up to two years.
Learn more about VUBFX at the Vanguard provider site. (opens in new tab)
Fidelity U.S. Bond Index Fund
- Fund category: Intermediate core bond
- Assets under management: $60.5 billion
- SEC yield: 1.5%
- Expenses: 0.025%
Fidelity U.S. Bond Index Fund (FXNAX (opens in new tab), $12.01) is a low-cost mutual fund that seeks to track the Bloomberg U.S. Aggregate Bond Index. This can allow for diversified exposure to the U.S. bond market in 2022.
Index funds are not the typical "go-to" bond fund for rising rate environments. But a low-cost fund like FXNAX could work well in 2002 for long-term investors who use dollar-cost averaging – or investing a set amount of money, regardless of the market price – in their portfolios.
If inflation and rising rates play out in a way that many analysts and finance talking heads expect for 2022, bond prices could see more downside pressure. This could be especially true in the first and second quarters, as the Fed's hand is forced to continue tapering down its asset purchase program and also to raise rates by mid-year.
As the bond market saw in 2013's "taper tantrum," and a similar event in 2018, prices fell in response to shifting Fed policy, and we could see that again in 2022. Although these events are foreseeable, they're still difficult to predict with accuracy.
Assuming bond prices fall in 2022, or there's short-term price volatility, a smart way to approach bonds in the year is to dollar-cost average into a passively managed bond index fund. And if your plan is to do so, the lower the expense ratio, the better.
That, as well as a broad, diversified portfolio, makes FXNAX one of the best bond funds for 2022 ... and beyond.
As for its portfolio, this Fidelity fund has more than 8,100 holdings, including U.S. Treasuries (40%), mortgage-backed securities (27.1%) and investment-grade corporates (25.4%). Duration, a measure of bond risk, is 6.5 years, implying that amid a 1-percentage-point rise in rates, FXNAX's net asset value (NAV) would decline by 6.5%.
Still, this is a high-quality portfolio, with nearly all of the holdings rated investment-grade or better.
Learn more about FXNAX at the Fidelity provider site. (opens in new tab)
Vanguard Inflation-Protected Securities Fund
- Fund category: Inflation-protected bond
- Assets under management: $41.1 billion
- SEC yield: -1.9%
- Expenses: 0.20%
Vanguard Inflation-Protected Securities Fund (VIPSX (opens in new tab), $14.66), which sports a negative yield at the moment, clearly isn't an income play.
However, VIPSX could still be one of the best bond funds for 2022, especially if inflation remains at elevated levels.
The vast majority (99.8%) of VIPSX's portfolio is made up of Treasury inflation-protected securities, or TIPS, which are bonds that are indexed to inflation. There are 48 bonds in total, and the principal value of these adjusts for movements in inflation.
Thus, when inflation is rising, the principal value of the TIPS is increasing. But if inflation somehow heads in the other direction in 2022, bond funds like TIPS likely won't outperform the broader bond market.
Investors should also keep in mind that, although TIPS may potentially perform better during inflationary periods, they still carry interest-rate risk. So, when the Fed decides to start raising rates, the market value of the underlying securities could decline, which would bring down the NAV of a fund like VIPSX.
With that said, VIPSX could be a good choice for investors who want fixed income in their portfolio for diversification purposes, or as an alternative or compliment to a core bond holding that may not perform as well in an inflationary environment.
Learn more about VIPSX at the Vanguard provider site. (opens in new tab)
Kent Thune did not hold positions in any of these bond funds as of this writing. This article is for information purposes only, thus under no circumstances does this information represent a specific recommendation to buy or sell securities.
Kent Thune, CFP, is a financial professional that helps individuals and businesses achieve their goals through a variety of delivery methods, including investment advice, financial planning and writing.
Can You Build a Retirement Income Plan With Both Risk and Reliability?
Two strategies for making retirement savings last — probability-based income planning and guaranteed income planning — can help ensure you have what you need in your golden years, but which is right for you?
By Scott M. Dougan, RFC, Investment Adviser • Published
5 Financial Wellness Tips to Help Weather the Winter
You can regain some control over today’s money pressures by exploring your employer's financial support options and benefits, making plans to save and taking other simple actions.
By Aaron Harding, CFP® • Published
9 Best Commodity ETFs to Buy Now
ETFs These commodity ETFs offer investors exposure to the diverse asset class, which is a helpful hedge against inflation.
By Jeff Reeves • Published
What is a Recession? 10 Facts You Need to Know
Markets Fears of an economic downturn are once again on the rise, but what is a recession, exactly? We tackle this and other questions here.
By Dan Burrows • Published
Kiplinger's Weekly Earnings Calendar (Nov. 21-25)
stocks Check out our earnings calendar for the upcoming week.
By Karee Venema • Published
Warren Buffett Stocks Ranked: The Berkshire Hathaway Portfolio
stocks The Berkshire Hathaway portfolio is a diverse set of blue chips, and increasingly, lesser-known growth bets. Here's a look at every stock picked by Warren Buffett and his lieutenants.
By Dan Burrows • Published
What Happens When the Retirement Honeymoon Phase Is Over?
In the early days, all is fun and exciting, but after a while, it may seem to some like they’ve lost as much as they’ve gained. What then?
By T. Eric Reich, CIMA®, CFP®, CLU®, ChFC® • Published
5 Top-Rated Housing Stocks With Long-Term Growth Potential
stocks Housing stocks have struggled as a red-hot market cools, but these Buy-rated picks could be worth a closer look.
By Will Ashworth • Last updated
Interest Rates Likely to Continue Climbing
Economic Forecasts Fed Chair Jerome Powell hinted that future interest-rate hikes might be smaller, but rates may ultimately reach a point higher than Wall Street wanted to hear.
By David Payne • Published
10 Best Stocks You've Never Heard Of
stocks The market is peppered with undiscovered gems boasting stable fundamentals and cheap valuations. Here are 10 of the best stocks flying under the radar.
By Lisa Springer • Published