How to Structure a Bond Portfolio When Rates Hit 20-Year Highs

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With long-term interest rates at 20-year highs and total bond market funds negative for the year, Adam Grossman of Mayport argues that the 40-year tailwind bonds enjoyed from 1980 to 2020 is unlikely to return — and that investors need a more deliberate approach. His recommended structure allocates 60% to short-term U.S. Treasury funds (such as Vanguard's VGSH), which lost less than 4% in 2022 when rates rose sharply, compared to a 13% loss for total-bond market funds that year. The remaining 40% is split between intermediate-term government bonds (20%) — which capture more upside when rates fall — and short-term inflation-protected Treasury bonds known as TIPS (20%), which research he finds convincing suggests are the most effective hedge against rising prices. High-bracket taxpayers (above 30%) may benefit from shifting some short-term holdings into municipal bond funds, which are exempt from federal income tax. Grossman also recommends holding a separate 'floor' of cash in a government money market fund so that a retiree can draw on something stable in years when both stocks and bonds are down.