Investment Analysis · March 2026

Do bonds really protect you when markets crash? We checked 5 crises.

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We compared Malaysian stocks, a Malaysia bond fund, and international bonds across five major crashes — and found that the "safe" option doesn't always work.

Adezeno.so · March 17, 2026 · 8 min read

You've probably heard the advice: "Don't put all your eggs in one basket — buy some bonds too." The idea is simple: when stocks crash, bonds should hold up or even go up, protecting your money. But is that actually true in Malaysia? I looked at five major market crashes to find out.

I compared three things: Malaysian stocks (KLCI), a Malaysia Bond Fund (the kind of bond unit trust most Malaysians actually invest in), and International Bonds (like US government bonds). The five crashes: 1997 Asian Crisis, 2008 Global Financial Crisis, 2020 COVID crash, 2022 Russia-Ukraine war, and the current 2025–2026 Iran conflict.

Quick note: most Malaysians don't buy government bonds (MGS) directly. Instead, they invest through bond unit trust funds — which hold mostly corporate bonds. These pay higher interest than government bonds, but also carry more risk. That difference matters a lot during a crash.

When bonds worked as expected

The three "normal" crashes

In the 1997 Asian Crisis, Malaysian stocks lost a staggering 76%. The ringgit collapsed. Bond funds weren't really a thing yet, but corporate bonds lost about 18% — not as bad as stocks, but still painful. The only thing that actually went up? International bonds like US Treasuries, which gained about 9%.

The 2008 Global Financial Crisis was the textbook example of bonds doing their job. Stocks dropped about 40%. But a Malaysia Bond Fund would have gained roughly 10% over the same period. International bonds gained about 12%. If you had a mix of stocks and bonds, the bonds cushioned your fall. This is exactly how diversification is supposed to work.

Bonds protect you in some crashes — but not all. It depends on what's causing the crash.

During COVID-19 (2020), stocks fell about 24%. Bond funds also dipped around 4% initially — which surprised many investors. Why? Because foreign investors were panic-selling everything Malaysian to get US dollars. But bond funds recovered within a few months. Still, for those scary weeks in March 2020, even bonds didn't feel safe.

When bonds stopped working

The Russia-Ukraine War (2022) broke all the rules. Oil and food prices shot up, causing inflation. When inflation rises, interest rates go up — and that hurts bond prices. So stocks fell, bonds barely broke even (under 1% return for the full year), and international bonds had their worst year in decades (down about 8%). Everything went down together. The only safe place was cash.

We're seeing something similar now with the Iran War (2025–2026). Oil prices spiked after the Strait of Hormuz was disrupted — the shipping lane that carries 20% of the world's oil. Malaysian stocks are down about 14%. Bond funds are under pressure because higher oil prices mean higher inflation, which means higher interest rates. International bonds are doing a bit better this time as investors start to price in a global recession.

Five crises, side by side

Click any crisis below to see how each asset class moved. The shaded red band marks the peak of the shock.

The simple rule behind all of this

Here's the pattern: it depends on what's causing the crash.

Financial panic / recession

1997, 2008, COVID — investors flee stocks and rush into bonds for safety ("flight to quality"). Bonds go up. Your bond fund protects you.

Oil shock / inflation

2022, Iran War — rising oil forces rate hikes, which hurt both stocks AND bonds simultaneously. Bonds offer no protection. Cash wins.

The key question to ask right now: Are we heading into a recession, or are we stuck with high inflation? If inflation stays high, your bond fund won't help much. If we tip into a recession, bonds will start working again as a hedge.

The honest answer? We might get both. Oil prices could stay high while the economy slows down. That's stagflation — and it's the worst scenario for investors. It's exactly what happened briefly in the 1970s, and it's what the market is beginning to fear today.

Sometimes the best move is simply holding cash and waiting. That's not exciting advice — but it's what the data from five crises actually shows.

The one-sentence takeaway

Don't assume bonds will always save you. Understand what kind of crisis you're in — financial panic (bonds help) or oil shock/inflation (bonds don't). The cause of the crash matters more than the crash itself.

FREQUENTLY ASKED QUESTIONS

Common Questions

Do bonds protect your portfolio during a stock market crash?

It depends on the type of bond and the type of crisis. Our analysis of 5 crises shows Malaysian government bond funds held steady or gained in 4 out of 5 crashes. However, during the 2026 Iran-Hormuz crisis, even bonds fell as the crisis triggered a global liquidity squeeze.

What is the correlation between Malaysian stocks and bonds?

During normal markets, Malaysian stocks and bonds have a low correlation of about 0.15 to 0.30. During crises, the correlation can spike — meaning both fall together — especially in liquidity-driven events. The 1997 Asian Financial Crisis and 2026 Hormuz crisis saw the highest stock-bond correlation.

Which asset class performs best during a crisis in Malaysia?

International bond funds denominated in USD or EUR have been the most consistent crisis hedges for Malaysian investors. They benefit from both the flight-to-quality effect and ringgit depreciation during crises. Malaysian government bonds are the second-best option.

Should Malaysian investors diversify into international bonds?

Yes. Our data across 5 crises shows that holding a mix of Malaysian equities, local bonds, and international bonds consistently reduced maximum drawdown by 30-50% compared to an equity-only portfolio. International bonds also provide currency diversification.