Why bonds suddenly look interesting again

If you’ve been investing in bonds the last few years, you’ve had every reason to be frustrated. Bond funds have lost money, cash yields suddenly look great, and it’s easy to wonder: should I just give up on bonds and park everything in cash?

I’ve been digging into the data, and my conclusion is the opposite: high-quality bonds look more attractive today than they have in over a decade. Not because the recent past has been kind to bond investors (it hasn’t), but because today’s higher yields set us up for better future returns.

Let’s walk through why, using a few real-world bond funds and some simple rules of thumb you can use in your own portfolio.

Cash vs. bonds: what people are asking

A lot of questions I get sound like this:

“My money market fund has kept up with inflation for decades. Why shouldn’t I just keep my whole ‘bond’ allocation there?”

Or: “Cash is yielding almost 4%, and my bond fund has basically gone nowhere. Why am I bothering with bonds?”

These questions make sense, especially if you’ve looked at your bond fund returns since 2021. To understand what’s going on, we need to compare three main buckets of fixed income:

• Cash-like funds – for example, short-term Treasury or government money market funds.

• Intermediate-term bond funds – like a total U.S. bond market index fund.

• Specialty bond funds – like TIPS (inflation-protected bonds) and municipal bond funds.

Each plays a different role. Cash is about stability. Intermediate bonds are about earning more over time in exchange for some price swings. TIPS and munis add inflation protection or tax benefits.

Why recent bond returns look so bad

Let’s start with the painful part: how bonds have actually behaved since 2021.

If you compare a cash-like Treasury fund to a broad intermediate-term bond fund over the last few years, here’s what you would have seen:

• Cash came out ahead – a short-term Treasury fund turned $10,000 into a bit over $12,000, with very little volatility.

• A total bond market fund lost money – that same $10,000 invested in a broad bond index fund in early 2021 would still be below your starting value.

• TIPS did a little better – inflation-protected bonds didn’t shine, but they at least held their value slightly better than nominal bonds.

On top of that, the bond funds were much more volatile than cash. You got worse returns and a bumpier ride. That’s the worst combination, and it’s why so many people are tempted to abandon bonds entirely.

To make matters worse, 2022 was a historically bad year for bonds, and even in more recent periods some broad bond funds have still been slightly negative year-to-date. It feels like bonds just can’t catch a break.

The key shift: today’s bond yields are much higher

So why am I more optimistic about bonds now than I’ve been in a long time?

Because what matters most for future bond returns is starting yield – the income the bond or bond fund is paying you today, as a percentage of its price.

Right now:

• A broad U.S. bond market index fund is showing an SEC yield around 5%.

• Not long ago (before 2022), that same type of fund was closer to 2%.

• Real yields (after inflation) on TIPS are near multi-decade highs – roughly 3% above inflation on longer-term TIPS.

That shift in yield is huge. A 2% starting yield and a 5% starting yield are two completely different worlds when you’re thinking about the next 5–10 years.

How starting yield predicts future bond returns

There’s a simple rule of thumb with high-quality bonds:

Over the medium term (around 5 years), your average annual return tends to be close to your starting yield.

Historically, when the yield on a broad bond index was around, say, 4–5%, the returns over the next 5 years usually ended up in that same ballpark. When yields were 2%, future returns tended to hover around 2%.

Research from major asset managers backs this up: they’ve plotted starting yield on the x-axis and the next 5 years of annualized returns on the y-axis. The dots form a pretty clear upward-sloping cloud: higher starting yields, higher future returns.

So when I see a broad bond index with a yield around 5% today instead of 2%, that tells me the expected return going forward is much more attractive than it was a few years ago.

“But rates could still go up”

A fair pushback is: what if interest rates keep rising? Won’t bond prices fall even more, and won’t I just lose more money?

In the short term, yes: if rates rise further, bond prices fall, and your bond fund’s value can dip. That’s the painful part we’ve been living through.

But there’s another side to that story:

• When rates rise, yields go up. New bonds in the fund pay more income.

• Over time, as the fund replaces maturing bonds with higher-yielding ones, your total return improves.

Looking back over history, periods where bond investors went through a lot of “rate pain” – big jumps in yields and negative returns – were usually followed by several years of strong bond performance. The higher yields eventually more than made up for the earlier price declines.

It’s very similar to what happens with stocks: bad years push prices down, which pushes future expected returns up. The cycle is uncomfortable, but it’s also what creates opportunity.

Why I still like intermediate-term bond funds

So where does that leave us with a plain-vanilla, intermediate-term bond index fund?

Here’s how I think about it:

• In a normal environment, intermediate-term bonds should earn more than cash over long periods, because you’re taking a bit of interest rate risk.

• Historically, since the early 1980s, a portfolio similar to today’s broad bond index has earned around 6%+ per year, versus roughly 4% for a cash-like money market fund.

• Yes, the last decade has been disappointing for bonds – but that was largely because yields were so low. Now that yields are much higher, the math going forward looks better.

We don’t know exactly what the next 10–20 years will look like. Maybe we won’t get another 40-year bull market in bonds like we did when rates fell from the early 1980s onward. But starting from higher yields is a much friendlier place to be than starting from near-zero.

Where TIPS fit in (inflation protection)

TIPS (Treasury Inflation-Protected Securities) are bonds where your principal and interest payments adjust with inflation. The key number with TIPS is the real yield – the yield above inflation.

Right now, real yields on 10-year and 30-year TIPS are around levels we haven’t seen since before the financial crisis. That means you can lock in something like:

• “Inflation + about 3%” on longer TIPS, or

• “Inflation + just under 3%” on 10-year TIPS (numbers move daily, but that’s the rough ballpark).

That’s powerful if your biggest fear is inflation eroding your purchasing power. A reasonable approach for many people is to mix:

• Nominal bonds (like a total bond market fund) for general income and diversification.

• TIPS for explicit inflation protection.

Why municipal bonds are interesting again

If you invest in a taxable account and you’re in a moderate or high tax bracket, municipal bond funds are worth another look.

Take a broad municipal bond index fund with a yield around 4.1%. That income is generally federally tax-exempt. When you adjust for taxes, the “tax-equivalent” yield can be much higher than it looks at first glance.

For example, in a high federal tax bracket, a 4.1% muni yield could be roughly equivalent to earning something like 6%–7% in a taxable bond or CD once you factor in the taxes you’d pay on that taxable interest.

The exact numbers depend on:

• Your federal tax bracket.

• Your state and local taxes.

• Whether you’re buying in-state or out-of-state municipal bonds.

But the big picture is this: with yields up, after-tax returns on municipal bonds have become more compelling, especially for higher earners investing outside retirement accounts.

Just keep in mind:

• Munis still have interest rate risk – prices can move up and down as rates change.

• They belong in taxable accounts, not IRAs or 401(k)s, because their main benefit is tax-exempt income.

So…why not just stay in cash?

Let’s come back to the original question: if a money market fund has roughly kept up with inflation over decades, why not just keep your whole bond allocation there?

Over very long periods, the pattern has generally been:

• Cash – tends to roughly keep up with inflation, sometimes a bit more, sometimes a bit less.

• Intermediate-term bonds – tend to beat both cash and inflation by a wider margin, in exchange for some volatility.

Looking back to the early 1980s:

• A government money market fund has earned around just under 4% per year.

• A bond portfolio similar to today’s broad bond index has earned around 6%+ per year.

That 2+ percentage point difference compounds dramatically over decades. It’s the whole reason to own intermediate-term bonds in the first place instead of parking everything in cash.

Now, it’s fair to say that part of those historical bond returns came from falling interest rates over 40 years. We can’t assume we’ll get that same tailwind again. But starting from today’s higher yields still makes it reasonable, in my view, to expect intermediate-term bonds to beat cash over the long run.

How I’d think about structuring fixed income

Here’s a simple way to think about your fixed income mix:

1. Decide how much true “cash” you need

This is money for your emergency fund, near-term goals (like a home down payment in the next 1–3 years), and anything where stability matters more than return. For this bucket, cash-like options (high-yield savings, money market funds, short-term Treasuries) are perfect.

2. Use bonds for the long-term part of your portfolio

For money you don’t need for several years, bonds can make more sense than extra cash:

• In retirement accounts: an intermediate-term total bond market fund, possibly mixed with TIPS.

• In taxable accounts: consider a mix of a broad bond fund and, if your tax bracket justifies it, a low-cost municipal bond fund.

This is also where rising bond yields can matter a lot for your overall plan. Higher expected bond returns can change how you think about risk, your stock/bond mix, and even things like home equity or how rising yields affect stocks (I dig into those in more detail in this article on rising bond yields and stocks and this one on bond rates and home equity).

When it might be reasonable to lean more on cash

Even though I’m more positive on bonds now, there are situations where leaning more on cash can make sense:

• You’re very close to a big spending need (tuition next year, a home purchase in 12 months, etc.).

• You simply cannot tolerate seeing your account balance move, even modestly, without panicking.

• Your time horizon for the money is very short (under 3 years), and return of principal matters more than return on principal.

But for the long-term, retirement-focused part of your portfolio, I’d be cautious about abandoning bonds entirely. Doing so essentially bets that short-term cash rates will stay high and that intermediate-term bonds won’t do what they’ve historically done: beat cash over time.

My personal takeaway

If you own bond funds today, you’ve been through a rough patch. It’s incredibly tempting to throw in the towel and hide in cash, especially when money market yields finally look decent again.

But higher yields have quietly made high-quality bonds more attractive than they’ve been in years. Yes, there may still be bumps if rates move around, but the starting point is much better now than it was when yields were near zero.

For my own portfolio, that means:

• Keeping a solid cash cushion for emergencies and near-term goals.

• Sticking with intermediate-term bond funds for long-term stability and income.

• Using TIPS and possibly municipal bonds where inflation protection or tax benefits make sense.

You don’t have to copy that exact mix, but I’d encourage you not to write off bonds just because the last few years have been painful. The very thing that hurt – rising yields – is also what sets bonds up to play a stronger role in our portfolios going forward.

As always, the goal isn’t to chase what’s been hot lately. It’s to build a boring, resilient portfolio that quietly supports your long-term financial freedom.