Bond Losses

A bond is a loan to a company, a government, or a city or state. Its value can fall when interest rates rise, when the issuer’s finances weaken, or when you need to sell and cannot find a buyer at a fair price. Bonds are often treated as the safer part of a portfolio, but they carry real risks, and some carry far more than others. Losing money on a bond is not, by itself, a claim. The key questions are whether the bond or bond fund fit the investor and whether the professional who recommended it fulfilled their duties.

This May Not Be Your Fault

Bonds have a reputation for safety, and many investors were told exactly that. But the regulators who oversee the markets are plain about it: bonds carry real risks, and some are hard to see coming unless someone explains them.

That is why the professional who recommended your bonds had a duty to understand those risks, explain them in terms you could follow, and recommend them only if they fit your goals, your age, and your need to reach your money. Under Financial Industry Regulatory Authority (FINRA) rules and Regulation Best Interest, a broker must use reasonable diligence, care, and skill and may not put their own interests ahead of yours. When that does not happen, responsibility may belong with the broker and the firm.

How Bond Losses Happen

A bond is a loan. The issuer pays interest and promises to repay the bond’s face value on a set maturity date. Holding a bond to maturity can make price swings along the way matter less, but many investors have to sell sooner. The Securities and Exchange Commission (SEC) and FINRA describe several risks:

• Interest rate risk. The SEC explains that market interest rates and bond prices generally move in opposite directions. A fixed-rate bond is worth less if rates rise and you sell before maturity, and the longer the maturity, the greater the effect. Government backing does not protect a bond’s market price. FINRA calls the measure of this sensitivity duration: the higher the number, the more a bond’s value is likely to move when rates change.
• Credit risk. The SEC notes the issuer may fail to make interest or principal payments, which is called a default.
• High-yield (junk) bonds. FINRA describes high-yield bonds as speculative grade. They pay more interest because default is more likely, they can be harder to sell, and they tend to move with stocks, so they may not balance a stock-heavy account. See our page on junk and high-yield bonds.
• Municipal bonds. These are issued by states, cities, and counties. The SEC says some trade infrequently, making a buyer hard to find, and that diversifying municipal holdings may help reduce risk.
• Call risk. An issuer may repay a bond early, often when rates fall. FINRA warns that reinvesting the money at a similar rate of return can be difficult.
• Bond funds. A fund holds many bonds, but it is not risk-free. The SEC says investors can lose money in a bond fund, even one that holds only government bonds.

Example: a retiree who relies on their savings for living expenses may be a poor fit for a portfolio built mostly on long-maturity bonds, because selling after rates rise can mean taking a loss on bonds that were described as safe.

Common Examples of Bond Loss Claims

• Bonds or bond funds described as “safe” to a retiree who needed stability, without an honest explanation of what could cause a loss, see Misrepresentation and Omission
• Long-maturity bonds recommended to an investor who would have to sell them to pay living expenses, see Unsuitable Recommendations
• A large share of an account placed in one bond sector, one issuer, or one state’s municipal bonds, see Overconcentration
• High-yield bonds presented as if they carried the same risk as higher-rated bonds
• Call features, rising-rate risk, or difficulty selling that were never explained before the purchase
• Bonds chosen for the commission or markup they paid the broker rather than for the investor’s needs, see Regulation Best Interest
• A firm that approved concentrated or risky bond recommendations without catching a pattern, see Failure to Supervise

How Can You Protect Yourself From Bond Losses?

Bonds can have a place in a retirement portfolio, but “safe” should never be the end of the conversation. A few questions help:

• Ask what could make you lose money. Rising rates, a default, an early call, and difficulty selling are all possible. If no one can explain which apply to your bonds, that is a warning in itself.
• Ask about duration and maturity. For a bond fund, the duration is on its fact sheet. For an individual bond, FINRA suggests asking your broker or firm.
• Ask how readily you could sell. Find out how often the bond has traded recently. FINRA’s Fixed Income Data tool can show this.
• Check how much is in one place. One issuer, one sector, or one state’s municipal bonds can hurt more than a mix.
• Ask how your broker is paid on the purchase. A bond that pays more to sell is worth a second look.

Signs Your Bonds May Have Been Unsuitable

• You were told bonds or a bond fund were “safe” or “like a CD,” but no one explained how the value could fall
• You needed the money and learned you could only sell at a loss
• Most of your savings ended up in bonds with long maturities
• A large part of your account was in one issuer, one sector, or one state’s municipal bonds
• You were sold high-yield bonds without being told what “high-yield” means
• A bond you expected to keep was repaid early, and you could not replace the income
• Your statements showed losses in a bond fund you were told could not lose principal
• No one reviewed your income needs, your age, or your timeline before recommending the bonds
• Your broker moved you out of one bond and into another, again and again