Bonds had a bad year in 2022. It was the worst year ever for bonds, according to some measures, explains Bob Carlson, a leading specialist in retirement investment strategies and editor of Retirement Watch.

When interest rates rise, bonds lose value. The longer the term of the bond, the more it loses. iShares 20+ Year Treasury Bond (TLT) - a Top Pick for more aggressive investors - lost more than 26% as of December 10, and it was down much more before a rally in November and early December.

But when interest rates decline, bond values increase. Long term bonds rise the most in value when rates fall. I expect interest rates to peak in the first half of 2023.

It's likely the Federal Reserve will stop tightening monetary policy by then. Economic growth should be declining, and so should inflation. Late in 2023 the Fed might turn to an easier monetary policy and begin reducing interest rates.

Market interest rates should fall before the Fed begins its easing policy. In this environment, long-term treasury bonds should generate significant capital gains by the end of 2023. In the meantime, investors will capture the yield on the bonds.

The main risk is that inflation doesn't decline fast enough. In that case, the Fed will maintain its tighter monetary policy longer and delay the switch to an easier monetary policy.

Another risk is that the Fed begins cutting interest rates before inflation is close to its target rate. The Fed might do that if inflation becomes stuck around 4% but the economy is in a recession.

The Fed might be unable to resist giving into complaints that its policy is too tight and causing too much economic pain. If that happens, we'll be in for a period of stagflation during which bond prices will fluctuate a lot but are likely to have negative returns much of the time.

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