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Was the Bond Market Abby-NORMAL?

Was the Bond Market Abby-NORMAL?

January 30, 2023

Young Frankenstein is a comedy horror film that was released in 1974. It was directed by Mel Brooks, and the screenplay was co-written by Brooks and the actor who played the title character, Gene Wilder. It is a parity of the horror film genre in general, and more specifically, of Mary Shelley’s classic 1818 novel Frankenstein. It was shot in black-and-white, and it uses numerous filming techniques from the classic 1930s movies that many of us grew up watching. 


In one particularly famous scene from the movie, Dr. Frankenstein begins to question whether the brain he has transplanted into a recently deceased criminal was really the brain of “scientist and saint”, Hans Delbrück. When questioning his assistant Igor, he finally learns the truth. Igor had dropped and ruined the brain he was supposed to get for his boss. Instead, he takes a brain labeled abnormal. He eventually confesses that the transplanted brain was from someone named Abby Normal. You can see a clip of this iconic scene below.


2022 also turned out to be Abby-Normal for the bond market. As I have documented here throughout the past year, the Federal Reserve Bank embarked on its fastest interest rate increase campaign in decades. After initially dismissing rising inflation as transitory, the Fed finally took the threat of higher prices seriously and began raising interest rates in March. They proceeded to raise rates seven times totaling 4 1/4%. They are telling us there is still more to come. As you know, bond prices move inversely with interest rates. This produced the worst loss in bonds in nearly 100 years.

  Source: Morningstar as of 12/31/22. U.S. bonds represented by the IA SBBI US Gov IT Index from 1/1/26 to 1/3/89 and the Bloomberg U.S. Agg Bond TR Index from 1/3/89 to 12/31/22

A second chart puts this in perspective even further. You can see that the distribution of bond returns has historically fallen in a rather tight range… until last year. If you look at the bottom left of the chart, you will see that 2022 was truly a negative outlier. in economic terms, this is known as left tail risk or a “black-swan” (extremely rare) event.


However, many economists, market strategists, and bond fund portfolio managers are more excited about potential future returns from bonds than they have been in years. This is because bonds are now paying higher interest rates than we have seen in at least 15 years. Our friends at PIMCO shared the following chart with us recently. They conclude that you can now get higher yields without having to go out to the far end of the risk spectrum.


As a reminder, the bond market teeter-totter works both ways. If and when the Fed feels that inflation has fallen sufficiently, they will eventually begin cutting interest rates to bring them back down towards what is historically considered neutral levels. When this occurs, people who own bonds will earn not only the above yields but will also reap the appreciation on those same bonds as interest rates fall.

Sources: and

In 2022, it seems the role of economic Dr. Frankenstein was played by Fed Chair Jerome “Jay” Powell. Like the title character of both the book and the movie, Chairman Powell did everything he could to make the last year an Abby-Normal in the bond market. As painful as this was, we wanted to help you understand that last year‘s pain could lead to future gains for those who are patient and disciplined.

The CFPs of Impel Wealth Management will continue to provide you with information and guidance about these and other issues that could impact your future financial success as we continue “Moving Life Forward”. 

© 2023 Jesse Hurst

The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.