How Bonds Cushion a Stock-Heavy Portfolio

Bonds have lost less than stocks in every losing stock year since 1928, but in 2022 the margin for 10-year Treasuries almost vanished. In the 26 calendar years from 1928 to 2025 when the S&P 500 lost money, three-month Treasury bills never had a negative year and 10-year Treasuries had five. How much a bond sleeve helps depends on two things: what kind of bonds it holds, and whether the sell-off came from a collapse in demand or from a jump in inflation and interest rates.

Key takeaways

In 2008 the 10-year Treasury series returned +20.1% while the S&P 500 lost 36.6%. In 2022 the same series lost 17.8% while stocks lost 18.0%.
A bond sleeve's cushion equals its weight times the gap between the bond and stock returns. For a 40% Treasury sleeve that gap was worth 22.7 percentage points in 2008 and 0.1 point in 2022.
In 2008 Treasuries rose while corporate bonds fell: the 5–10 year Treasury index gained 16.77%, the 5–10 year credit index lost 4.66% and the high-yield index lost 26.16%. In 2022 every bond index in the table below lost money, TIPS included.
Longer maturities magnified both outcomes. The long Treasury index gained 24.03% in 2008 and lost 29.26% in 2022.
Rebalancing turns the cushion into buying power. In a 2007–2012 test, $100,000 in a 60/40 mix rebalanced every year ended at $137,519, compared with $129,693 without rebalancing and $114,509 in stocks alone.

What bonds did in bad stock years

The table uses Aswath Damodaran's annual return data for US stocks, bills and bonds, last updated in January 2026. Stocks are the S&P 500 and its predecessors, with dividends. T-bills use the average three-month rate for the year. The 10-year Treasury and Baa corporate figures are estimates built by repricing a constant-maturity bond from year-end yields, so they behave like an index and are not the returns of any fund.

Year	S&P 500	3-month T-bills	10-year Treasury	Baa corporate
1931	−43.8%	+2.3%	−2.6%	−15.7%
1937	−35.3%	+0.3%	+1.4%	−4.4%
1974	−25.9%	+7.8%	+2.0%	−4.4%
2001	−11.8%	+3.5%	+5.6%	+8.6%
2002	−22.0%	+1.6%	+15.1%	+12.1%
2008	−36.6%	+1.4%	+20.1%	−3.4%
2022	−18.0%	+2.1%	−17.8%	−15.2%

Across all 26 losing years for stocks in the data, T-bills had a positive return every time. The 10-year Treasury series fell in five of them: four times by about 5% or less, and in 2022 by 17.8%. Baa corporate bonds, the lowest investment-grade rating tier, fell in nine, including 1931, 1937, 1974, 2008 and 2022. Every bond series beat stocks in every one of those 26 years. In 2022, though, the 10-year Treasury came out ahead by only 0.2 point.

Calendar years also hide what happened inside them. A portfolio can fall further between a mid-year peak and a later trough than any December-to-December number shows, so these figures understate how deep the worst stretches felt.

The arithmetic of a bond sleeve

For a portfolio that is reset to its target weights at the start of each year, the year's return is a weighted average. Comparing it with an all-stock portfolio shows what the bond sleeve saved.

Portfolio return = w_s × r_s + w_b × r_b
Loss avoided vs. 100% stocks = w_b × (r_b − r_s)

Here w_s and w_b are the stock and bond weights, which add up to 1, and r_s and r_b are the stock and bond returns for the year. The second line shows the main point: the cushion is the bond weight multiplied by the gap between the two returns. A big gap, as in 2008, makes a large cushion. In 2022 the two returns were almost the same, so the cushion was close to zero whatever the bond weight.

Year	100/0 stocks/bonds	80/20	60/40	Loss avoided by the 40% sleeve
1931	−43.8%	−35.6%	−27.3%	16.5 points
1937	−35.3%	−28.0%	−20.7%	14.7 points
1974	−25.9%	−20.3%	−14.7%	11.2 points
2001	−11.8%	−8.4%	−4.9%	7.0 points
2002	−22.0%	−14.5%	−7.1%	14.8 points
2008	−36.6%	−25.2%	−13.9%	22.7 points
2022	−18.0%	−18.0%	−18.0%	0.1 point

The bond sleeve here is the 10-year Treasury series. Results are rebalanced each January and leave out fees and taxes.

The cushion builds up over bear markets that last several years. Compounding the same annual data, with rebalancing each year, gives these results:

1929–1932: stocks −64.8%, 80/20 −53.5%, 60/40 −40.1%.
1973–1974: stocks −36.5%, 80/20 −28.9%, 60/40 −20.8%.
2000–2002: stocks −37.4%, 80/20 −24.7%, 60/40 −10.6%. Over those three years the 10-year Treasury series gained 41.8%.

The choice of sleeve changed the answer more than the weight did. With Baa corporates as the 40% sleeve instead, the 2008 result was −23.3% rather than −13.9%. With T-bills it was −21.4%. In 2022 the order flipped: a T-bill sleeve gave −10.0%, a Baa sleeve −16.9% and the 10-year Treasury sleeve −18.0%.

Which kinds of bonds held up

The two most recent tests point in opposite directions. The table shows index returns as reported in Vanguard's May 2009 bond fund prospectuses (for 2008, when the indexes carried the Barclays Capital name) and its May 2023 bond fund prospectus filing (for 2022, under the Bloomberg name). These are index returns, before any fund costs. The TIPS figure is the 2022 return of the ICE US Treasury Inflation Linked Bond Index, taken from the benchmark data on the iShares TIPS Bond ETF page.

Bond type (index)	2008	2022
US 1–5 Year Treasury	+8.83%	−5.47%
US 5–10 Year Treasury	+16.77%	−12.58%
US Long Treasury	+24.03%	−29.26%
US 5–10 Year Credit (investment-grade corporates)	−4.66%	−13.74%
US Long Credit A or Better	−0.24%	−25.62%
US Corporate High Yield	−26.16%	−11.19%
TIPS (ICE US Treasury Inflation Linked)	not shown	−11.85%
S&P 500, for comparison (Damodaran)	−36.6%	−18.0%

Treasuries versus corporate bonds

A Treasury pays only for the passage of time and changes in rates. A corporate bond also carries the risk that the issuer defaults, and investors demand more extra yield for that risk when a recession looks likely. The 2008 gap between +20.1% for the 10-year Treasury series and −3.4% for Baa corporates means corporate yields did not follow Treasury yields down: the extra yield on corporate debt widened enough to cancel the rally. The lower the credit quality, the bigger the hit. The high-yield index fell 26.16%, so junk bonds behaved more like a smaller dose of stocks than a cushion. Research on flight-to-safety days by Baele, Bekaert, Inghelbrecht and Wei, covering 23 countries, found that such days make up under 2% of the sample. On those days bonds beat stocks by 2.7% on average, and money flows out of equity funds into government bond and money market funds.

Short, intermediate and long maturities

Longer bonds gain more when yields fall and lose more when they rise. A bond's duration measures that sensitivity: as a rough guide, its price moves by about duration × the change in yield, in the opposite direction. Year-end figures from FRED show how far yields moved. The 2-year Treasury yield fell from 3.05% to 0.76% in 2008, then rose from 0.73% to 4.41% in 2022. The 10-year yield went from 4.04% to 2.25%, then from 1.52% to 3.88%. The 30-year yield went from 4.45% to 2.69%, then from 1.90% to 3.97%.

For a newly issued 10-year note, duration was about 8.2 at the start of 2008 and about 9.2 at the start of 2022. Starting yield plus duration times the fall in yield gives an estimated +18.6% for 2008. The same formula gives about −20.3% for 2022. The repriced Damodaran figures are +20.1% and −17.8%. The rule of thumb is a straight-line approximation that ignores the curvature of bond prices, and its error grows with the size of the yield move. The index table shows the overall pattern: in 2008 the long Treasury index gained almost three times as much as the 1–5 year index, and in 2022 it lost more than five times as much.

TIPS: protection against a different risk

The principal of Treasury Inflation-Protected Securities rises with the CPI and falls with deflation, though at maturity the Treasury pays the higher of the adjusted or the original principal. Their market price, though, moves with real (after-inflation) yields. The 10-year TIPS yield rose from −1.04% to 1.58% during 2022. Rising real yields pushed TIPS prices down, and the inflation adjustments did not make up for it: the TIPS index lost 11.85% that year. In 2008 the 10-year TIPS yield rose from 1.73% to 2.14% while the nominal 10-year yield fell by 1.79 points. So TIPS missed the rally that lifted ordinary Treasuries that year. TIPS protect buying power over their life, not market value during a stock sell-off.

Why 2008 and 2022 split

In 2008 the shock hit demand. Credit markets froze, earnings collapsed and investors moved toward government debt. The Federal Reserve cut its policy rate from 4-1/4 percent in December 2007 to a range of 0 to 1/4 percent in December 2008. Falling yields raised Treasury prices just as stocks fell, which is the pattern that makes bonds a cushion.

In 2022 the shock was inflation. Consumer prices rose 6.5 percent over the 12 months to December 2022. The Fed started raising its range from near zero in March 2022 and reached 4-1/4 to 4-1/2 percent by December. Higher yields cut bond prices directly and also lowered the value placed on future company earnings, so both assets fell together.

The older cases fit the same pattern. In 1931 the Fed raised interest rates during the international financial crisis of that autumn, a decision the Federal Reserve's own history of the Great Depression describes as a repeated mistake. Treasuries slipped 2.6% that year while stocks lost 43.8%. In 1974, with inflation at 12.3% in Damodaran's CPI series, Treasuries still returned +2.0% in dollars. After inflation, that was a loss of about 9.2%.

Rebalancing after the fall

Rebalancing means selling what held up and buying what fell to get back to the target weights. It puts the bond gains to work at lower stock prices.

Illustrative example: $100,000 in a 60/40 mix, 2007–2012

Assume $100,000 is invested at the start of 2007 using Damodaran's S&P 500 and 10-year Treasury returns, with no fees or taxes. One version is reset to 60/40 every January. The other is never touched.

End of year	60/40, rebalanced yearly	60/40, never rebalanced	Stock share, never rebalanced	100% stocks
2007	$107,375	$107,375	58.9%	$105,485
2008	$92,459	$93,102	43.1%	$66,928
2009	$102,736	$97,631	51.8%	$84,285
2010	$115,350	$109,109	53.2%	$96,777
2011	$124,201	$118,512	50.0%	$98,808
2012	$137,519	$129,693	53.0%	$114,509

By the end of 2008 the rebalanced portfolio was 44% stocks. Getting back to 60% meant selling about $14,600 of Treasuries after their 20.1% gain and buying stocks just before the S&P 500's 25.9% gain in 2009. The rebalanced mix ended 2012 about $7,800 ahead of the untouched mix and $23,000 ahead of all stocks.

The gain from rebalancing came from this particular sequence of a crash followed by a rebound. When stocks rise year after year, rebalancing keeps selling the winner. From 2013 to 2021, the same $100,000 grew to $256,357 rebalanced and $285,569 untouched, because the untouched mix drifted to 83% stocks. The Rebalancing Calculator in this site's calculators section shows the trades needed to restore a target mix from current balances.

What the cushion cost over 98 years

Over 1928–2025, rebalanced every year, the compound annual return was 10.0% for 100% stocks, 9.3% for 80/20 and 8.3% for 60/40, before fees, taxes and inflation. In dollars, $100 grew to about $1,157,000, $594,000 and $257,000. The smaller drawdowns shown earlier came with a much smaller ending balance over very long periods.

Frequently asked questions

Before 2022, did Treasuries ever fall in the same year as stocks?

Yes, though rarely and usually by a little. In Damodaran's series the 10-year Treasury had negative returns in 1931 (−2.6%), 1941 (−2.0%), 1969 (−5.0%) and 2018 (−0.02%), all years when the S&P 500 also fell. What made 2022 unusual was the size of the bond loss, −17.8%, which nearly matched the stock loss.

How did inflation change the real value of the cushion?

Nominal returns can hide losses in buying power. With Damodaran's CPI figures, T-bills returned about −4.1% after inflation in 2022 and about −4.0% in 1974, even though both nominal returns were positive. In 1931 prices fell 9.3%, so T-bills earned about +12.8% after inflation and the 10-year Treasury about +7.5%, despite its small nominal loss.

How did bonds do in the years after 2022?

In Damodaran's data the 10-year Treasury series returned +3.9% in 2023, −1.6% in 2024 and +7.8% in 2025. That left it 9.5% below its start-of-2022 level after four years. Over the same four years T-bills compounded to +17.8%, the S&P 500 to +51.9% and a yearly-rebalanced 60/40 mix to +25.0%. Higher starting yields after 2022 raised bond income, but they did not erase the 2022 price loss within that period.

Is a money market fund the same as holding T-bills?

Not exactly. The SEC's investor bulletin on money market funds explains that government money market funds keep 99.5% or more of their assets in cash, government securities or fully collateralized repurchase agreements. It also says money market funds are not guaranteed by the FDIC and can lose money, for example if a stable net asset value fund "breaks the buck" and reprices below $1.00 a share. A T-bill held to maturity pays its face value from the US Treasury, while a fund's result depends on its holdings and fees.

Does rebalancing out of bonds trigger taxes?

It can in a taxable account. Under IRS Topic 409, selling an asset for more than its adjusted basis creates a capital gain. The gain is long-term if the asset was held more than one year and short-term, taxed as ordinary income, if held one year or less. Inside a traditional IRA, IRS Publication 590-B says amounts including earnings and gains generally are not taxed until distributed, so trades there do not create a tax bill when they happen.

Checking a portfolio's cushion

List what the bond sleeve actually holds: Treasuries, investment-grade corporates, high yield, TIPS or cash-like funds. A fund's name may not reveal its credit mix, but its fact sheet or annual report does.
Note each bond fund's average duration. It tells roughly how much the fund moves for a 1-point change in yields, in either direction.
Run the formula above with the current weights and two test years: 2008 (the 10-year Treasury at +20.1%, stocks at −36.6%) and 2022 (−17.8% and −18.0%). Then repeat it with the returns of the bond types actually held, taken from the table above.
Write down when rebalancing happens, either on a calendar date or when a weight drifts past a set band. That way the trade after a crash is decided in advance.
Check which accounts the rebalancing trades would happen in, since sales in taxable accounts can realize capital gains.