Inflation is like kryptonite for bonds, whose interest payments are fixed and thus can’t grow to keep pace with rises in the cost of living. Until recently, inflation seemed like a problem of the distant past, when it often plagued bond investors.
For most of the four decades since 1981, interest rates have been falling and bond prices rising, creating a tailwind of capital gains for fixed-income investors. You not only earned interest on your bonds but pocketed extra profit as they went up in value.
Over some long periods, such as the 20 years ending in March 2020, bonds earned even higher returns than stocks, without any of their bloodcurdling losses.
Those glory years are gone.
“I think the long downtrend in interest rates has finally come to an end,” says Mr. Taylor. “People have been wrong about the direction of rates for 40 years, but I have to think that at this point they might finally be right.”