How Can a Bond Fund Fall by Over 50% in a One Year Period?

Bonds are often described as the ‘defensive’ part of a portfolio. That is broadly true, but it can also be misleading. The word ‘bond’ covers a wide range of investments, from very short-term government bills through to bonds that do not mature for several decades. Crucially, they do not all behave in the same way because of their differences.

One of the most important differences is duration. Duration measures how sensitive a bond, or bond fund, is to changes in interest rates. As a rough rule, if a bond fund has a duration of five years, a one percentage point rise in yields would be expected to reduce its value by about 5%. If it has a duration of 15 years, the same rise in yields would be expected to reduce its value by about 15%. The relationship also works in reverse: if yields fall, longer-duration bonds tend to rise more sharply. Vanguard describes duration as an estimate of how much the value of the bonds in a fund will fluctuate in response to changes in interest rates, and notes that longer-duration bonds are more sensitive to interest-rate movements (Vanguard 2026a; Vanguard 2026b).

This is why the choice between shorter-duration and longer-duration bonds matters so much. If the purpose of bonds in a portfolio is to provide stability, liquidity and a cushion against equity-market falls, then taking large amounts of duration risk may undermine that role. Long-duration bonds can be useful in certain circumstances, but they are not simply a ‘safer’ version of equities. They are a large interest-rate directional bet.

A useful example is the Vanguard U.K. Long Duration Gilt Index Fund. The fund tracks the Bloomberg U.K. Government 15+ Years Float Adjusted Bond Index, meaning it invests in UK government bonds with maturities greater than 15 years (Vanguard 2026a). At the end of February 2026, the fund had an average maturity of 26.1 years and an average duration of 15.6 years (Vanguard 2026a). That is a very different risk profile from a short-duration bond fund which may have an average duration of between 1 and 5 years.

The experience of 2022 showed this very clearly. As interest rates rose sharply, long-dated gilts fell heavily. The Bank of England noted that long-dated UK government debt was particularly affected during the gilt-market stress of late September 2022, with the speed and scale of the rise in gilt yields creating a material risk to UK financial stability (Bank of England 2022). Vanguard’s own factsheet shows that the Vanguard U.K. Long Duration Gilt Index Fund fell 35.66% in the 12 months to 30 September 2022 and fell a further 12.95% in the 12 months to 30 September 2023 (Vanguard 2025). From October 2021 to December 2022, the drawdown was approximately 51%. That is not a small wobble. That is an equity-like fall from an asset many investors would instinctively think of as ‘safe’.

The reason is not that UK government bonds suddenly became junk bonds, but rather, long duration. When yields rise, the fixed payments from existing bonds become less attractive relative to newly issued bonds offering higher yields. Their prices therefore fall to match the yields available on equivalent new issues. The longer the bond, the further into the future those fixed payments are spread, and the more sensitive the price is to changes in the discount rate.

An Example

Imagine two investors each have £100,000 in high-quality government bonds. Investor A owns a short-duration bond fund with a duration of three years. Investor B owns a long-duration bond fund with a duration of fifteen years. If yields rise by one percentage point, Investor A might expect a capital fall of roughly £3,000. Investor B might expect a fall closer to £15,000. The exact number will depend on the shape of the yield curve, convexity and the underlying bonds, but the direction is clear: longer duration means more interest-rate sensitivity.

Now imagine yields rise by two percentage points. Investor A’s short-duration fund might fall by roughly 6%, taking £100,000 down to around £94,000. Investor B’s long-duration fund might fall by roughly 30%, taking £100,000 down to around £70,000. That is before considering any income received, but the basic point remains. If the investor’s goal was to hold bonds in order to preserve capital, the longer-duration portfolio may have delivered a very uncomfortable outcome relative to the stated goal.

Spending

This is particularly important for investors who may need to spend from their portfolio. Suppose an investor expects to use part of their bond allocation to fund spending over the next three to five years. A shorter-duration approach is usually better aligned with that objective. The bonds mature sooner, the portfolio can reinvest at higher yields more quickly, and the capital value is usually less exposed to sharp changes in long-term interest rates. A long-duration bond fund, by contrast, may still be a perfectly valid investment, but it is less naturally suited to short- or medium-term spending needs.

Why Would Anyone Want Longer Duration Bonds?

None of this means long-duration bonds are always bad. They can perform very well when yields fall given price rises. They can also become uncorrelated to equities in times of economic crisis; think of ‘flight to relative safety’. Further, they can make sense for investors or institutions trying to match long-term liabilities, such as pension schemes with payments stretching far into the future. However, for a private investor using bonds as the stabilising part of a balanced portfolio, very long duration can introduce more volatility than they expected.

To Conclude

The lesson is simple: do not just ask whether you own bonds. Ask what kind of bond risk you own. Credit risk, inflation risk and currency risk all matter, but duration risk is one of the big ones. Shorter-duration bonds will not remove risk entirely, but they can help keep the defensive part of a portfolio more defensive. Longer-duration bonds may offer more upside if yields fall, but they can also produce large losses if yields rise. Investors should be clear which trade-off they are choosing.

For capital preservation, spending needs and portfolio stability, shorter-duration bonds may be better aligned with the job investors usually expect their defensive assets to do.

References

Bank of England. 2022. ‘Financial Stability Report – December 2022’. Bank of England.

Vanguard. 2025. Vanguard U.K. Long Duration Gilt Index Fund Factsheet. Data as at 30 September 2025.

Vanguard. 2026a. Vanguard U.K. Long Duration Gilt Index Fund Factsheet. Data as at 28 February 2026.

Vanguard. 2026b. ‘How Interest Rate Moves Drive Bond Returns’. Vanguard UK Professional.