Fixed Income (Bonds)

Buying a bond is making a loan. The issuer pays a coupon on a set schedule and returns the principal at maturity, so the cash flows are known in advance in a way equity cash flows never are.

Bonds have historically cushioned equity drawdowns, though the relationship is a tendency rather than a rule. 2022 is the counterexample worth remembering: stocks and bonds fell together, because the thing driving both was the same sharp rise in rates.

The mechanism behind that is worth understanding, because it surprises people. Bond prices move opposite to rates. A bond paying 3% becomes less attractive once new issues pay 5%, so its price falls until the yields match. The longer the bond has left to run, the further it has to fall to get there.