Skip to content

Episode 138 – What Are Bonds and Why Do They Matter in Retirement Planning?

When most people think about investing, they immediately think about stocks. The daily market headlines focus on the Dow Jones, the S&P 500, and the Nasdaq. Rarely do you hear anyone talking about bonds.

But bonds quietly play one of the most important roles in the global financial system—and in many retirement portfolios.

In Episode 138 of the Last Paycheck, advisors Rob Hoxton and Archie Hoxton explore some surprising facts about bonds, how they work, and why they matter for investors approaching retirement.

While bonds may not be the most exciting investment topic, understanding them can help you make smarter decisions about portfolio stability, income, and diversification.

What is a bond?

One feature that makes bonds unique is that they are tradable.

This means investors can buy and sell bonds in secondary markets before they mature.

A good analogy is a mortgage. Sometimes your mortgage is sold to another bank after you take it out. Bonds operate in a similar way, except anyone in the market can trade them.

Because bonds can be bought and sold, their prices fluctuate based on several factors, including:

  • Interest rates
  • Credit quality of the issuer
  • Supply and demand in the market

This trading activity adds complexity to bonds but also provides liquidity.

The Bond Market Is Larger Than the Stock Market

One of the most surprising facts discussed in this episode is the sheer size of the bond market.

Globally:

  • The stock market is valued at roughly $126–$127 trillion
  • The bond market is about $145 trillion

In other words, the bond market is significantly larger than the stock market.

The United States alone accounts for roughly $58 trillion of global bond issuance across government, corporate, and municipal bonds.

This scale reflects how bonds are used to fund major economic activity.

Governments issue bonds to finance spending. Municipalities issue bonds to build infrastructure like hospitals, schools, and public facilities. Corporations issue bonds to finance expansion, factories, and research.

In many ways, the bond market is the financial system’s plumbing.

Credit Quality Matters

Because bonds are loans, the ability of the borrower to repay is extremely important.

If a borrower has strong financial stability, investors are willing to accept lower interest rates. If the borrower has a higher risk of default, investors demand higher interest rates as compensation for that risk.

This is why bonds are often categorized by credit quality.

High-quality bonds, such as U.S. Treasury bonds, tend to offer lower yields but higher security. Lower-rated bonds may offer higher yields but carry greater risk.

Why Bonds Matter in Retirement Portfolios

Bonds are often included in retirement portfolios for two primary reasons:

1. Lower Volatility

Bonds typically fluctuate less than stocks.

When stocks experience sharp declines, bonds often move differently, helping smooth overall portfolio volatility.

2. Income Generation

Bonds provide predictable interest payments, which can help support income needs during retirement.

For retirees who rely on their portfolios to fund living expenses, this stability and income stream can be extremely valuable.

Bonds Aren’t Risk-Free

Although bonds are generally considered more stable than stocks, they are not risk-free.

For example, in 2022 the Federal Reserve raised interest rates aggressively to combat inflation. This caused one of the worst bear markets for bonds in more than a century.

While bonds still declined less than stocks in many cases, the episode serves as a reminder that bonds can experience losses.

Diversification and thoughtful portfolio construction remain important.

When Bonds Move Differently Than Stocks

One of the benefits of bonds is that they sometimes behave differently than stocks.

For example:

  • During the 2008 financial crisis, government bonds increased in value while stocks fell sharply.
  • During the dot-com crash of the early 2000s, bonds helped offset stock market volatility.

However, this relationship is not guaranteed. In certain environments—such as 2022—stocks and bonds can both decline.

Understanding this relationship is a key part of portfolio design.

The Strange Case of Negative-Yield Bonds

One of the most unusual bond market events occurred in 2020 during the COVID economic shutdown.

At that time:

  • Interest rates were pushed extremely low.
  • Investors flooded into bonds seeking safety.

As demand surged, the prices of many bonds rose so high that their yield to maturity became negative.

In practical terms, this meant that investors buying those bonds were guaranteed to lose money if they held them to maturity.

This unusual situation occurred because fear and liquidity needs drove investors toward the perceived safety of bonds, even at a negative return.

Some Bonds Last 100 Years

Most bonds have maturities between a few months and 30 years.

But there are some extraordinary exceptions.

Certain countries—including Austria, Mexico, Argentina, and Ireland—have issued century bonds, which mature in 100 years.

These bonds are typically purchased by large institutional investors such as pension funds or sovereign wealth funds that have extremely long investment horizons.

A Bond That Has Been Paying Interest Since 1624

Perhaps the most remarkable bond mentioned in the episode was issued in 1624 by the Dutch Water Authority.

The bond was created to fund repairs to dikes and was issued in perpetuity, meaning it never matures.

More than 400 years later, the bond is still technically paying interest—about €15 per year.

It is one of the longest-running financial instruments in existence.

Why Bonds Deserve More Attention

While bonds may not dominate financial headlines, they are a critical part of the financial system.

They help fund governments, corporations, and infrastructure. They provide income for investors. And they play a key role in building balanced retirement portfolios.

For anyone approaching retirement, understanding how bonds function within a broader financial strategy can help support long-term stability.

—

If you are approaching retirement, understanding how your investments are allocated between stocks, bonds, and other assets is critical to maintaining stability and income throughout retirement.

To help you evaluate whether your portfolio is aligned with your goals and risk tolerance, download the Investment Alignment Worksheet.

Download worksheet

This worksheet will guide you through reviewing your current allocation and identifying whether your investments are positioned to support your long-term retirement plan.

If you would like help evaluating your portfolio strategy, you can also schedule a conversation with the team at Hoxton Planning & Management.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.