Chapter 6 – My Love-Hate Relationship with Treasury ETFs and Bonds
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I thought bonds were supposed to be boring and safe—until 2022, when my long-term Treasury fund lost 31% in a year. Here's what I've learned about "safe" assets, why I still own them, and how I make bonds work for me as an ETF investor.
The Great Bond Shock: How Risky Can Safe Get?
Ten years ago, bonds meant peace of mind. But if you held long-term Treasury ETFs like TLT from 2015 to 2025, the experience was anything but dull:
If you bought TLT at its August 2020 high ($171), it dropped more than 49% to around $87 by October 2023. This was the sharpest bond bear market since the 1970s. The culprit? The most aggressive interest rate hikes in four decades, with the 10-year Treasury yield jumping from 0.5% (July 2020) to over 4.6% by late 2023.
Why Did Bonds Crash?
When interest rates rise, the value of existing bonds falls. This is called interest rate risk. Long-term bond ETFs like TLT are most sensitive: for each 1% rate rise, they can lose 15–20% in value. Shorter-term Treasury ETFs (SHY, IEF) fell much less.
Why I Still Own Bonds—Even After the Crash
The devastation in long bonds was a gut-check. Most of my bond allocation is now intermediate (IEF, 7–10yr), some in short-term (SHY, 1–3yr), and only a slice in long-term (TLT), as an "insurance" play when I believe rates might fall.
Four reasons keep bonds in my ETF portfolio:
1. Diversification (Especially in a Crash)
Bonds don't always zig when stocks zag, but in most stock market panics, Treasurys rally. In March 2020, when stocks cratered, TLT soared. In 2022 it didn't—because both bonds and stocks lost money as inflation spiked. But historically, balanced stock/bond portfolios recover faster and reduce drawdowns.
2. Rebalancing Fuel
During deep stock market dives, bonds often rise or lose less. I use these moments to rebalance: sell some bonds, buy discounted stocks, then ride the rebound.
3. Predictable Income
Bonds pay interest, usually quarterly or monthly in ETFs. As rates rose, new bond purchases started yielding 4.5–5%, fattening my income stream, and creating opportunities to reinvest at better yields.
4. Sleep-at-Night Factor
I care about compounding, not maximizing returns at all costs. Keeping 15–30% of my portfolio in bonds (mostly intermediate, a little short-term and long-term) helps me hold stocks through turmoil.
The Three Main Treasury ETF "Flavors"
Here's how I use the three key types of Treasury ETFs:
Fees for these "passive" ETFs are now rock-bottom:
SHY: 0.15%
IEF: 0.15%
TLT: 0.15%
Understanding the Risks: Inflation, Interest Rates, and Opportunity Cost
No investment is risk-free—not even Treasury.
Interest Rate Risk
As rates go up, bond prices fall, especially for long-term bonds. TLT fell much harder than IEF or SHY. TLT has experienced a maximum drawdown of -47.75% from its 2020 highs, which lasted over 60 months.
Inflation Risk
Bonds pay a fixed dollar amount, so when inflation spikes (as in 2021–2023), their real (inflation-adjusted) payoff shrinks.
Opportunity Risk
While bonds are "safe," stocks have historically outperformed bonds by a wide margin over decades.
Market Risk
Treasury ETFs are still market-traded, so they can show volatility, even though U.S. default risk is near zero.
Behavioral note: Even "safe" bond ETFs can drop 30–50% in unusual rate spikes. TLT's 47.75% maximum drawdown proves that owning too much long-duration can lead to panic selling when you need stability the most.
Treasury Inflation-Protected Securities (TIPS): The Inflation Hedge
When inflation hit 9% in 2022, many investors discovered TIPS ETFs (like SCHP, VTIP, TIP). TIPS are U.S. government bonds whose principal adjusts with inflation.
How TIPS Work:
If CPI inflation is 5%, your principal rises 5%
Interest paid on the inflation-adjusted principal
In high inflation, TIPS can outperform regular bonds
In 2021–2022, TIPS outperformed Treasuries but still lost money as real yields rose:
I hold 5% of my portfolio in SCHP, as "insurance." In sustained inflationary periods, TIPS outperform nominal Treasuries.
How Much Bonds? My Actual Portfolio and Why
Current Allocation (~age 40):
18% in intermediate Treasuries (IEF)
5% in TIPS (SCHP)
3% in short-term Treasuries (SHY)
4% in long-term Treasuries (TLT)
Total bonds: 30% of portfolio
Equities: 67% (including alternatives)
Cash: 3%
Why this mix?
Intermediate bonds (IEF) as core: Balances rate risk and yield—not as volatile as long-term bonds, but higher yield than short-term.
TIPS for inflation insurance: SCHP protects against unexpected inflation spikes that could erode bond purchasing power.
Short-term for liquidity: SHY provides "dry powder" and liquidity buffer with minimal interest rate risk.
Long-term only in small doses: TLT for potential big rate-drop rallies, but kept small due to extreme volatility (47.75% max drawdown).
When stocks crash, I often shave a bit from bonds to rebalance into equities, except in major rate spike environments where both bonds and stocks fall together.
When Bonds Shine—and When They Don't
Bonds shine when market participants are gripped by fear and seek a safe haven. In deflationary scares—think 2008 financial crisis or the initial COVID shock—Treasury ETFs surge as investors flee risk assets. When inflation is under control or actually falling, fixed-income yields rise in real terms and bond prices hold up, making the cushion more reliable.
Similarly, when the Federal Reserve shifts from tightening to cutting rates after a crisis, long-duration bonds can soar, delivering outsized returns on rate pivots. During steep equity drawdowns, bond ETFs become the ultimate rebalancing fuel, allowing you to sell bonds at a premium and buy stocks at depressed levels. Even the prospect of an economic recession alone can trigger a flight-to-quality, sending bond prices higher as growth fears dominate investor sentiment.
Bonds suffer when the macro environment turns against fixed-income fundamentals. Sudden and unexpected inflation spikes crush bond prices, as we saw during 2021–2022’s rapid CPI surge. When interest rates rise swiftly—rising from near-zero to 4–5% in just 18 months—long-duration bonds can lose 30–40% of their value, reminding us that bonds carry interest rate risk, too. Periods of ultra-low yields leave nowhere for rates to go but up, creating a one-way bet against fixed-income holders. When inflation and growth both accelerate simultaneously, bonds are caught in the vice of rising rates and tightening monetary policy.
Finally, a hawkish Fed outlook—signaling more rate hikes ahead—can keep bond prices under relentless pressure until policy pivots back toward accommodation. In these environments, even U.S. Treasuries, once deemed “risk-free,” can deliver painful losses.
Historical Context: Bond Performance in Stock Bear Markets
The 2022 experience was unusual because inflation drove both stock and bond declines simultaneously.
Bond ETF Selection: My Specific Choices
Intermediate Treasuries: IEF vs VGIT vs IEI
I choose IEF because it hits the sweet spot of yield and duration risk, with excellent liquidity at $33 billion AUM.
Short-Term: SHY vs VGSH vs SGOV
SHY provides the best balance of yield and maturity for my cash alternative needs.
TIPS Options: SCHP vs VTIP vs TIP
SCHP offers the best combination of low fees (0.05%) and reasonable duration exposure.
The Corporate Bond Temptation (And Why I Avoid It)
Corporate bond ETFs like AGG (broad market), LQD (investment grade), and HYG (high yield) offer higher yields than Treasuries but come with additional risks:
Corporate Bond Risks:
Credit risk: Companies can default
Correlation with stocks: Corporate bonds fall when stocks fall
Complexity: Harder to analyze hundreds of corporate issuers
Liquidity risk: Less liquid than Treasuries during stress
2022 Performance Comparison:
TLT (long Treasury): -31.4%
AGG (broad bonds): -13.0%
LQD (investment grade corporate): -15.8%
HYG (high yield): -11.2%
Why I Stick to Treasuries:
When it comes to fixed income, nothing beats the simplicity of U.S. Treasuries. There’s no need to pore over credit ratings or analyze hundreds of corporate balance sheets—Treasuries carry the full faith and credit of the U.S. government, which means default risk is essentially zero. This one feature alone turns what could be a complex credit evaluation exercise into a straightforward “buy and hold” decision.
Liquidity is another compelling reason. Unlike most corporate or municipal bond funds that can seize up during periods of market stress, Treasury ETFs trade with deep, continuous liquidity regardless of market conditions. On the worst days of the March 2020 crash, you could still sell TLT or IEF at tight bid-ask spreads—an invaluable trait when you need to raise cash quickly or rebalance your portfolio without waiting for a buyer.
Treasuries also deliver true diversification benefits because their returns often move independently—or even inversely—of equities in most crisis scenarios. When stocks crater, investors flock to government bonds as a safe haven, driving bond prices up even as growth assets decline. That negative or low correlation with stocks is exactly what you want in a core stabilizing allocation.
Finally, there’s the predictability factor. With Treasuries, you know exactly what your cash flows will look like: scheduled coupon payments and a guaranteed principal redemption at maturity. That reliability is especially comforting in retirement, when uncertain or volatile income streams can derail even the best withdrawal plans.
If I decide to take on credit risk—whether it’s corporate bonds, high-yield debt, or private credit—I prefer to do so through equities. Stocks inherently reward credit risk with higher expected returns, and I’d rather earn that premium through ownership of companies than through the bond market. For the bedrock of my portfolio, though, nothing matches the simplicity, liquidity, diversification, and predictability of U.S. Treasuries.
International Bonds: Why I Skip Them
International bond ETFs provide exposure to foreign government and corporate bonds, but add complexity I don't need:
International Bond Challenges:
Currency risk: Foreign bonds fluctuate with currency movements
Lower yields: Many developed countries have lower rates than U.S.
Political risk: Foreign governments can change policies
Complexity: Understanding multiple countries' fiscal situations
My Approach:
Focus on U.S. Treasuries for stability and let my stock ETFs (VTI, SPY, QQQ) provide international exposure through multinational corporations.
My Bond Portfolio Evolution
Early Years (Age 25-30):
Bond allocation: 10-20%
Strategy: Simple, mostly IEF
Rationale: Young, high risk tolerance
Current Years (Age 35-40):
Bond allocation: 30%
Strategy: IEF core + TIPS + some TLT speculation
Rationale: Balanced approach, rebalancing fuel
Future Years (Age 45-55):
Bond allocation: 40-50%
Strategy: Focus on intermediate duration, reduce TLT speculation
Rationale: Wealth preservation becomes more important
Pre-Retirement (Age 55-65):
Bond allocation: 50-60%
Strategy: Bond ladder + ETFs, more predictable income
Rationale: Capital preservation, income generation
Behavioural Challenges with Bond Investing
The 2022 Test:
When my "safe" bond allocation lost 25%, it challenged my assumptions about portfolio stability. Key lessons:
Managing Bond Volatility:
When bond prices fall, it’s tempting to hit the panic button—but remember: bond ETF losses are merely mark-to-market, not permanent until you actually sell. Staying calm and keeping a long-term perspective are essential. Instead of reacting to every headline or yield spike, lean on predetermined rebalancing rules. By setting clear thresholds for when to buy or sell—rather than making decisions in the heat of the moment—you eliminate emotional timing errors.
It’s also critical to understand duration risk. Contrary to popular belief, long-term bonds can be more volatile than stocks during periods of rising interest rates. A 1% rate increase can send TLT tumbling 15–20%, which is why I limit long-duration exposure and favor intermediate-term Treasuries for my core bond allocation.
Finally, focus on income—bond ETF distributions continue flowing even when prices fall. In a rising-rate environment, newly issued bonds pay higher coupons, so over time your yield—and income stream—rises, helping to offset mark-to-market price declines if you hold to collect those coupons.
Avoiding Common Mistakes
The most dangerous trap in the bond market is chasing yield. High-yield and riskier credit often move in lockstep with equities during downturns, erasing any expected diversification benefit. Similarly, timing duration by predicting interest rate moves is a fool’s errand; even professional bond traders get rate calls wrong more often than not.
Resist the urge to abandon bonds after a tough year. The 2022 bond bear market was an outlier driven by rapid inflation and unprecedented rate hikes. Historically, bonds have delivered crisis protection in every other major market downturn. Exiting bond ETFs after a loss crystallizes that loss and robs you of future diversification benefits.
Lastly, keep it simple. Overcomplicating your bond strategy with exotic securities, leveraged products, or intricate laddering often undermines performance. Simple Treasury ETFs deliver liquidity, low costs, and the diversification you need without unnecessary complexity. Remember: complexity is not the same as edge.
Key Takeaways: Bonds in a Modern ETF Portfolio
After living through the bond bear market of 2022-2024, here are my essential insights:
The Hard Truths About Bond Investing
Bonds aren't risk-free, even government bonds. Interest rate risk can cause severe losses, especially in long-duration bonds like TLT which experienced a 47.75% maximum drawdown.
Inflation is bonds' biggest enemy. When real yields rise rapidly, even inflation-protected TIPS can lose money as we saw in 2022.
Diversification doesn't always work. 2022 showed that stocks and bonds can fall together when inflation surprises to the upside.
Duration is the key risk factor. Long-term bonds (TLT) are more volatile than many stocks; intermediate bonds (IEF) provide better risk-adjusted returns.
The Reasons Bonds Still Matter
Crisis insurance that works most of the time. Bonds rallied during 2008, 2020, and most other stock market crashes—2022 was the exception, not the rule.
Rebalancing fuel when you need it most. Bonds often hold value or gain when stocks crash, providing dry powder to buy equity dips.
Predictable income stream. Even when bond prices fall, the income payments continue and increase as rates rise.
Behavioral anchor during volatility. A 30% bond allocation prevents panic selling of stocks during market turmoil.
Implementation Strategy
Duration Management: Focus on intermediate-term bonds (IEF) as core holding—they balance yield and volatility better than short-term or long-term bonds.
Inflation Protection: Maintain 5-10% allocation to TIPS (SCHP) as insurance against unexpected inflation spikes.
Liquidity Management: Keep some short-term bonds (SHY) for cash-like liquidity with better yields than money markets.
Speculation Discipline: Limit long-term bonds (TLT) to small positions for rate-decline speculation, not core stability.
Bond Allocation by Life Stage
Ages 25-35: 10-20% bonds (mostly IEF)
Ages 35-45: 20-30% bonds (IEF core + TIPS + small TLT)
Ages 45-55: 30-40% bonds (focus on stability)
Ages 55-65: 40-50% bonds (capital preservation)
Ages 65+: 50-60% bonds (income generation)
The Bottom Line on Treasury ETFs
Bond investing through Treasury ETFs isn't as boring as it used to be. The 2020s taught us that even government bonds can be volatile when inflation surprises and central banks respond aggressively.
But that doesn't mean abandoning bonds—it means using them more thoughtfully. Intermediate-duration Treasury ETFs like IEF provide the best balance of yield, stability, and diversification benefits. TIPS offer inflation insurance. Short-term bonds provide liquidity. Long-term bonds should be used sparingly for speculation, not stability.
The key insight: bonds don't eliminate volatility—they change the type of volatility. Interest rate risk replaces equity market risk. For most portfolios, that trade-off still makes sense, especially when you need rebalancing fuel during the inevitable next stock market crash.
Most importantly, 2022's bond bear market reminded us that no asset class always goes up. Having realistic expectations about bond volatility prevents behavioral mistakes like panic selling at the worst possible time.
In the next chapter, we'll explore the opposite end of the risk spectrum: Bitcoin ETFs and alternative assets that provide inflation protection and portfolio diversification through entirely different mechanisms.
Next: Chapter 7 will examine Bitcoin ETFs and the rise of alternatives—the wildcard allocation in today's diversified portfolio.
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Disclaimer: This article constitutes the author’s personal views and is for entertainment and educational purposes only. It is not to be construed as financial advice in any form. Please do your own research and seek advice from a qualified financial advisor. From time to time, I have positions in all or some of the mentioned stocks when publishing this article. This is a disclosure - not a recommendation to buy or sell stocks.