10 Best Performing Bond ETFs in 2023

Ramish Cheema
8 min read

In this piece, we will take a look at the ten best performing bond ETFs in 2023. If you want to skip our introduction to the bond market then take a look at 5 Best Performing Bond ETFs in 2023.

The bond market is one of the biggest financial markets in the world and one that also often plays a crucial role in politics. It was pushed to the limelight of global affairs a year back from now after former British Prime Minister Lizz Truss took over charge of the government. At the time, the British economy was facing one of its worst crises in history due to high fuel, energy, and food inflation that came from the Russian invasion of Ukraine. Britain is one of the most heavily debt financed nations in the world, and its bond interest is paid through tax revenues. In order to stimulate growth, the Truss administration announced a plan to reduce taxes, raise more debt, and provide businesses with incentives.

This created chaos in the bond market as investors became worried about the ability of the government to fund its existing bond debts and as a result, British bond yields soared to nearly 5% for 30 year bonds. A bond's yield is the coupon interest payment divided by its price, and a higher reading is indicative of instability in the market since it shows a price drop. The high yields also affected the value of the Pound, which slumped to a record low to nearly touch parity with the U.S. dollar.

The result of all this was the resignation of Ms. Truss as prime minister, making her one of shortest term premiers in Britain's history. A bond market turmoil led to the resignation of the leader of one of the world's largest economies. Naturally, this shows just how big the global bond market is. Quantifying its size, data compiled by the World Economic Forum, the global bond market was worth more than $100 trillion as of Q3 2022. For comparison, consider the fact that the five largest stock exchanges in the world had a combined market capitalization of roughly $60 trillion during January 2023 and the scope of the bond market becomes clear.

In fact, bonds and equities are two of the biggest sources of funding for firms with bonds being the only one of these that are used by governments to finance their growth, budget deficits, or other operations. For firms, debt is often used for its tax exemption advantages, to keep ownership structures intact, develop good credit, and cheaply finance long term growth. On the other hand, too many loans can affect a firm's credit rating and lead to funding difficulties later on. For investors, the primary advantage of debt financing is that firms are obligated to pay back their debt in case of liquidation while equity owners do not have this luxury. Of course, from the investor perspective, equity financing also has its advantages, the biggest of which is perhaps the growth in value if the stock is traded in public or private markets. So while stock holders are able to enjoy share price appreciation in case a firm's management executes well, bond holders have to stay content with regular interest payments as their return.

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