Here’s why stock investors turn to bonds during market crashes

Let’s take a look at why stock investors turn to bonds. As they did during the Corona Crash, the GFC, the crash of 1987…and now. It is because bonds are perceived as a safe haven asset. But is this really the case?

Why stock investors turn to bonds during market crashes: Safety

First of all we’d like to clarify that it is mostly government bonds that investors turn to. Not ‘junk bonds’ – those that are below investment grade.

Bonds that are not ‘junk bonds’, particularly government bonds (like U.S. Treasury bonds), are generally considered safer investments than stocks. They provide a fixed return (interest payments) and are less volatile compared to equities, making them an attractive option when stock markets are experiencing significant downturns.

Government bonds, in particular, are backed by the government, which gives investors confidence that they will get their principal back at maturity. Not certainty, but confidence.

In the interim, that is to say until the maturity of the bond, there are theoretically lower losses. During market crashes, the stock market can experience sharp declines, and many stocks may lose a substantial portion of their value. During the Corona Crash, some days saw more than 5% declines in the baseline indices and some stocks fell even more. In 5 weeks, the entire ASX 200 fell over 35%.

In contrast, bonds typically offer more predictable returns and are less susceptible to the extreme swings that stocks experience in a crash. The principal value of a bond tends to remain more stable, particularly for high-quality bonds.

Other purposes too

Moreover, a further appetiser in the case of some bonds is the income from them. Bonds usually provide regular income in the form of interest (also known as coupons), which can be particularly appealing when stock prices are volatile and dividends may be cut or suspended. During market downturns, having a steady income stream from bonds can help investors maintain some level of financial stability.

We also note that bonds can help diversify an investment portfolio, reducing overall risk. When stocks are falling sharply, bonds often behave differently. For example, government bonds may rise in value as investors seek safety, while stock prices are falling. This diversification can help smooth out the volatility in a portfolio.

During a market crash (like the one going on right now over the Trump tariffs), central banks often lower interest rates in an effort to stimulate the economy. When interest rates fall, bond prices tend to rise, which can make bonds more attractive to investors. The “flight to quality” phenomenon occurs when investors seek the safest possible assets, typically driving up demand for government bonds.

They also help with defensive investment strategies. Many institutional investors and fund managers have predefined risk management strategies, such as moving to bonds when the stock market becomes highly volatile.

This shift helps them protect their portfolios from deeper losses and ensures they are still earning some return while waiting for market conditions to stabilise.

So should you turn to bonds?

Well, probably only if you can wait until the bond’s maturity, because it can be difficult to redeem money from them prior to maturity. Remember that the Corona Crash lasted 5 weeks, and even the GFC crash only lasted 6 months. The typical US treasury bond is 10 years. And in the longer-term, equity markets have always outperformed bonds.

So we wouldn’t recommend investors sell all their shares and put all their money into bonds. Investors should sit tight with their money, unless they are desperate to reduce capital gains made earlier during the current financial year, and thus reduce their tax bill.

Conclusion

In summary, during market crashes, investors often turn to bonds because they provide relative safety, predictable income, and a buffer against stock market volatility. This move is a defensive strategy to preserve capital and manage risk while navigating periods of economic uncertainty

What are the Best ASX Stocks to invest in?

Check our buy/sell tips