Why Your Bond Fund Still Shows a Loss at 5% — and Why That Isn’t the Whole Story

October 2026

By Will Glyn

I have had the same conversation three or four times this month. A client reads that government bond yields are at their highest in a generation, opens their platform to look at the bond fund in the cautious part of their portfolio, and finds it still down over five years. Then they ask me a very reasonable question: if safe assets are paying 5%, why is my safe money showing a loss?

The headline is real. On 7th October the yield on the US 10-year Treasury briefly touched 5.35%, its highest since 2002 according to Bloomberg and CNBC, before easing back after a well-received auction. On 12th October BlackRock, the world’s largest asset manager, ended a Treasury underweight it had held for most of the last six years, moved shorter-dated Treasuries to overweight, longer-dated ones only to neutral, and took US equities down to neutral — in its own words, to “lock in some attractive income”. When the people who spent six years avoiding government bonds decide the price is now right, it is worth paying attention.

I wrote in August about why bonds had been losing money. This piece is about the next question, which is the one clients are actually asking: why the fund you hold doesn’t seem to benefit when yields rise, what a 5% starting yield does and doesn’t change, and how I think about the different jobs cautious money does, now that there are more ways to do them.

Where the income went

Take a typical global bond index fund. The Vanguard Global Bond Index Fund, in its hedged, accumulating form, is as good an example as any. It holds around 15,000 government and investment-grade bonds from around the world, charges 0.15% a year, and is about as plain a bond fund as exists. According to its own factsheet, it returned minus 0.73% a year over the five years to the end of August — a loss of roughly 3.6% in total. For anyone who holds it as the steady part of the portfolio, that number takes some explaining, and it deserves one.

Two things explain it, and neither is that the fund did anything wrong. The first is that a bond fund has no maturity date. A single bond that falls in price pulls back towards its face value as its maturity approaches, and barring default you get your money back. A fund holds thousands of bonds and keeps rolling the maturing ones into new ones, so its sensitivity to yields stays roughly constant. When yields rise, the fund takes the price hit and then simply carries on holding the same sort of bonds. There is no date on which it comes good, so a loss sits on the statement with nothing visibly repairing it.

The second is that with accumulating units the income is invisible. The fund has been collecting interest the whole time — its bonds carry an average coupon of 3.4% — but that income is reinvested rather than paid out, so it never shows up as cash arriving. It is simply folded into the unit price. When the price falls by more than the income adds, which is what happened as yields rose sharply in 2021 and 2022, the income disappears into the hole and the statement shows a loss and nothing else. A client holding the distributing version of the same fund would have seen money arriving every quarter and a larger fall in capital. If that income is reinvested the total return is the same, but it looks very different on a statement.

The same factsheet makes the point about timing. The loss is almost all 2022, when the fund fell around 14% as yields rose from a little over 1% to around 4%, with a small loss in 2021 before it. It then made money in each of 2023, 2024 and 2025 — 3.64% a year over the three years to the end of August — and 2026 was marginally negative to the end of August as yields climbed again. Someone holding individual bonds lost just as much on paper in 2022; the difference is that they had a maturity date to wait for.

What a 5% starting yield actually changes

Here is the part that gets lost in the headlines. A higher yield does not mean bond prices will rise from here. It means you are now being paid a fair rate to wait, and it gives you a cushion against further rises that did not exist three years ago.

The arithmetic is simple enough to do on a napkin, and the number you need is on the factsheet. Look for “yield to maturity” — the return the fund’s bonds will deliver from today if held to the end; Vanguard labels it “yield to worst”, which is the slightly more cautious version of the same number — and “duration”, which tells you roughly how much the fund moves for each one percentage point change in yields. For the Vanguard fund above, the factsheet shows a yield to worst of 4.45% and a duration of 6.0 as at the end of June, and yields have risen further since. Divide the yield by the duration and you get the rise in yields the fund can absorb over a year before its total return turns negative: about 0.75 percentage points. In 2021 the same sort of fund yielded little more than 1% with a duration of about seven and a half years, so the cushion was under 0.2 of a point — which is why almost any rise in yields produced a loss, and why the fund lost as much as it did.

It cuts the other way too. If yields were to fall by that same 0.75 points over a year, the same fund would return somewhere around 9%. So the range of outcomes has shifted from “small upside, large downside” to something closer to balanced, with a 4–5% income accruing while you wait. That is what BlackRock means by locking in income, and it is the real case for bonds at these levels.

Two caveats I keep in front of clients. First, yields may well rise further: Federal Reserve minutes released last week showed most officials expect another rise this year, Bank of England rate-setter Megan Greene has argued again for a hike, and with Brent crude still above $100 a barrel the inflation picture is not settled. Second, a yield of 4–5% against US inflation of 3.7% on this week’s figures is a real return of around 1% at best. That is positive, which it was not in 2021, but it is not the free lunch the headline suggests.

And one point that answers the client’s question directly: a fund with a constant duration does recover, just slowly and invisibly. If yields stay where they are, a fund with a six-year duration and a yield to maturity of 4.5% is, in effect, offering something in the region of 4.5% a year over the next six years, before any effect from the currency hedge. The loss from 2021 and 2022 is already in the price, and what the fund offers from here is the current yield, measured from today rather than from what you paid.

Why we all ended up in bond funds in the first place

It is worth remembering that for most of living memory the bond fund was not a bad deal. Yields fell more or less continuously from the early 1980s to 2020, from the mid-teens to close to zero. In that world a fund that never matures is a feature: it keeps rolling into bonds that then rise in price, so you collect the coupon and a capital gain on top. And in each of the big equity sell-offs of that period — 2000, 2008, 2020 — government bonds rallied hard while shares fell, which is exactly what the cautious part of a portfolio is for.

Add the practical reasons and the fund wins by default: individual bonds need sizeable minimums per holding, retail dealing spreads are wide, coupons have to be reinvested by hand, and rebalancing twenty bonds is a chore where rebalancing two funds is a click. For most portfolios the fund is the realistic way to own a diversified, investment-grade bond book.

None of that has changed, and I still think a global bond fund is the right core holding for most cautious money. What 2022 showed is that cautious money does more than one job, and that it is worth being explicit about which job each piece is doing.

The three jobs cautious money does

When I look at the defensive part of a portfolio now, I find it useful to split it by purpose, because the purposes pull in slightly different directions.

• Money you might need in the next year or two — this belongs in cash or a money-market fund, in the currency you will spend it in. A bond fund can hold it, but a six-year duration brings more movement than money you need next year really wants, and with cash rates where they are there is no longer a cost to keeping it separate.
• Insurance against an equity crash — this is the job longer-dated government bonds do, and here the constant-duration fund is the right tool, because you want that price sensitivity: it is what makes the fund rise when shares fall in a recession. Accept that it will also fall when inflation surprises, as it did in 2022, and size it accordingly.
• Income you can count on — this is the job where the lack of a maturity date matters most, and where there is now an option that did not exist a few years ago. Fixed-maturity ETFs, such as the iShares iBonds and Invesco BulletShares ranges available in UCITS form, hold a basket of bonds that all mature in a given year, then wind up and pay out. You get the pull-to-par and something close to the locked-in yield of a direct bond with the diversification and dealing of an ETF. For larger portfolios, a ladder of individual bonds does the same job.

Three smaller checks sit underneath that split. Read the yield-to-maturity line on the factsheet, not the five-year performance line, when you judge a fund: the first tells you what the fund is positioned to earn, the second only what it has done. Check the duration against how soon you will need the money. And look at which currency the fund is hedged to, if it is hedged at all: the Vanguard fund above comes in sterling-, euro- and dollar-hedged versions, and the right one is the one that matches what you spend. Bond income is also taxed very differently depending on where you are resident, which is a conversation in itself.

What I would do now

Not much that is dramatic. Selling a bond fund because it had a bad 2022 is selling after the loss and before the recovery, which I have written about before as one of the most expensive habits in investing. Piling into long-dated bonds because yields are high is a bet that yields have peaked, and recent central-bank commentary says that bet is not settled.

The more useful work is quieter and more specific. Look at what the cautious part of your portfolio holds and be clear which job each piece is doing. For most people the answer is that the core bond fund stays, and is now earning a yield worth having. For some, new money earmarked for income may suit a fixed-maturity holding alongside the core fund, and today’s yields make this an attractive point to start. And if you have been out of bonds altogether, as a fair number of my clients have, it is worth recognising that staying out at these yields is now an active choice rather than the cautious default. It may well still be the right choice, but it is worth making it deliberately.

How We Can Help

At Proctor Wealth Associates we are independent advisers who work with internationally mobile clients, and the defensive part of a portfolio is the part people look at least, which is where a second pair of eyes earns its keep. We can help you:

• See what your cautious money is really doing — a clear picture of the funds you hold, their yield to maturity and duration, and whether they match the job you gave them.
• Split it by purpose — separating the money you might need, the crash insurance and the income so each is held in the vehicle that suits it.
• Put new money to work at today’s yields — including fixed-maturity ETFs and direct bonds where they fit, without reaching for risk you don’t need.
• Match it to your currencies and your residence — so your bonds are hedged to what you spend, and held in the right structure for where you live.
• Keep it under review — so the next move in yields is something you understand rather than something that catches you out.

If you would like a second pair of eyes on the cautious part of your portfolio, you can book a call with me and we will go through it together.

Will is an Independent Financial Adviser with over a decade of experience helping expats make the most of their international status.