Bonds Pay in Good and Bad Times

bonds spelled out by wooden blocks in front of financial charts

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The 2025 stock market has been a rollercoaster with more uncertainty on the horizon. Rebalancing your portfolio to include more fixed-income assets, which pay ongoing interest or dividends, can help reduce losses during a future downturn. “If you held on through the spring and into the summer rebound, you likely haven’t lost money and have a freebie to revisit,” says David Rosenstrock, a financial planner with Wharton Wealth Planning in New York City.

With fixed-income investments, such as bonds, you put up your money for a specified period and receive interest income during that time, just like making a loan. They performed poorly for over a decade following the 2008 financial market crash. Market interest rates were near zero, and these assets paid little.

Today, interest rates are closer to their historical average, so fixed-income assets, which also include CDs, money-market funds and some ETFs and mutual funds, provide a more reasonable return along with safety.

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So find the right balance for you. That depends on your goals and, most importantly, your risk tolerance. The rule of 120 suggests that you subtract your age from 120. That’s the highest percentage you should have in stocks, with the rest in either cash or fixed-income. Another strategy is to have at least five years of living expenses in cash and fixed-income, so you have plenty of time to wait out stock market downturns in retirement.

“If you were losing sleep during all that market volatility, it likely says you’re taking on too much risk and should move into more fixed-income,” says Rosenstrock.

Here are some types of fixed-income investments, offering different balances between return and risk:

U.S. Treasuries

The U.S. government issues Treasuries in the forms of bills, notes and bonds to borrow money from investors.

The Treasury return is often referred to as the risk-free rate, showing the confidence investors feel in the U.S. government to make promised payments.

U.S. Treasuries are available for periods running from four weeks to 30 years. Treasury bills (a.k.a. T-Bills) mature in a year or less; T-Notes mature in two to 10 years, and T-Bonds mature in 20 or 30 years. Currently, Treasuries are paying 4% to 5% a year, and the interest payouts are taxable.

Important: The value of Treasuries can fluctuate, depending on current interest rates. Hold to maturity, and you get all of your principal back. But if you cash out early, the value is what the market says that day. If rates have gone up since your initial purchase, the value of your Treasury will fall. If rates fall, value goes up.

Since interest rate trends are unpredictable, one strategy is to spread your money over Treasuries maturing at different times, known as a ladder. That way, if rates fall after your initial purchase, you have some cash still locked in at higher rates, and if rates rise, your short-term Treasuries will mature sooner, returning money to reinvest at higher rates.

TIPS and STRIPS

There are variations of U.S. Treasuries. Treasury Inflation Protected Securities (TIPS) allow you to earn more interest should inflation go up, but less if inflation falls. The amount you get back at maturity can also be higher than you paid when inflation is high.

Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) do not pay interest income. Instead, you pay a smaller amount upfront, and your return comes from a larger payout at maturity. For example, you pay $6,755 for a STRIP that guarantees a $10,000 repayment in 10 years, roughly a 4% annual return.

One drawback, though, is that you owe income tax on the assumed return each year, even though you don’t receive the ongoing interest income. To avoid tax on this phantom income, keep STRIPS in a tax-deferred retirement account.

Municipal bonds

State and local governments issue municipal bonds to raise money. They are a little riskier than Treasuries, as there is a greater chance that these governments might run into financial trouble and fail to make their promised interest payments.

In exchange, municipal bonds can earn a higher after-tax return on your money because municipal bond interest is exempt from federal taxes (although not from all state income taxes). If you are in the 24% tax bracket, the tax-free payout on a 4% muni-bond is equivalent to a Treasury paying 5.26%.

Corporate bonds

Companies also issue bonds. The safety of the bond depends on the organization behind it. Independent agencies, such as Moody’s and Fitch assign companies a credit rating. Companies with a BBB- or higher credit rating are considered investment-grade bonds. The agencies deem these bonds as more likely to pay their creditors as promised, with the higher the score, the better the company’s creditworthiness. Investment-grade bond yields are averaging a little over 5% on the Bloomberg U.S. Corporate Bond Index.

On the other hand, corporate bonds with a rating of BB+ or lower are known as high-yield or junk bonds. These companies are more likely to miss payments, and if the company encounters serious financial trouble, it may not repay your principal. In exchange, they pay much higher interest rates. The S&P U.S. High Yield Corporate Bond Index earned an 8.89% annual return over the last three years.

“Are junk bonds risky? You bet, but so is the stock market," says Robert Tipp, head of global bonds at PGIM, Prudential’s investment management division. He notes that while losses in junk bonds are possible, a diversified portfolio with bonds from different issuers has historically experienced much less severe annual losses than the stock market.

Preferred stock

Preferred stock is a hybrid of stocks and bonds. Preferred stock shares receive fixed dividend payments, ranging from 6% to 9% a year. However, those payments are not promised by the company, unlike bond interest. If a company encounters financial difficulties, it could temporarily suspend payments. Depending on the terms, the company may catch up on missed payments later or it may not.

On the other hand, preferred stockholders take priority over common shareholders in receiving dividend payments. However, if the company does well, the preferred stock shares do not appreciate in value like common equity on the stock market.

Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.

David is a financial freelance writer based out of Delaware. He specializes in making investing, insurance and retirement planning understandable. He has been published in Kiplinger, Forbes and U.S. News, and also writes for clients like American Express, LendingTree and Prudential. He is currently Treasurer for the Financial Writers Society.

Before becoming a writer, David was an insurance salesman and registered representative for New York Life. During that time, he passed both the Series 6 and CFP exams. David graduated from McGill University with degrees in Economics and Finance where he was also captain of the varsity tennis team.