Investing in government bonds or in bond funds is meant to be a “defensive” play. That is, you get a nice secure income without much risk of capital loss. After all, the biggest issuer of bonds is the Australian Government - and lending to it should be “as safe as houses”.

Bonds are also historically categorised as “negatively correlated assets”. This means that when added to a portfolio that contains riskier assets such as shares or property, bond prices go the opposite way. So when the share market tanks and prices fall, bond prices should rise which then provides an offset for the portfolio. The theory says that in the right combination and relative to risk, shares and bonds can deliver the optimal return.

So imagine the surprise many investors are getting when they examine the returns on their bond investments last financial year. Bonds and bond funds have bombed – losing on average between 8% and 16%. Moreover, they have fallen in price at the same time as share prices have fallen.

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