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Are buying Bonds a Safe Investment?

Updated: May 9, 2022

Investors buy bonds for several reasons. Income, stability and safety are the primary ones. Many investors also think when they buy a bond that the principal is basically frozen in time and that they will get back what they paid when the bonds either mature or are called or they want to sell them. This is true in a few instances and not true most of the time. Unless you buy the bond at par ( or the call price ) you may get either more or less than you paid for a bond at maturity. And in the meantime, bonds will change in value based on how much time is left before maturity ( this is known as the bonds duration) and what is going on in interest rates. Bond prices fluctuate just like stocks and commodities. But bonds are, most of the time, easier to understand...You see bonds are like a teeter totter.

And as interest rates fluctuate the bond's price naturally does too. Think of, in general, when rates are going down then bond prices go up. This is simple to understand by looking at the pretend bond / teeter totter in the above cartoon. If the rate for bonds the day after you bought a bond that yields 10% go down, then you would expect to have that newly purchased 10% bond worth more. Thats because, if the interest rates had dropped to 9%, you have a bond that yields 10% and that's worth more to a potential buyer.

All of you who had bonds in your portfolios for the last +20 have seen this phenomenon. Rates have been in general, DROPPING. And your bond values, for those bonds you bought when rates were higher, have gone up in value.

BUT NOW rates are going up. According to our friends at First Trust, for the period 8/4/2020 to 3/15/2022 the total return on a 7-10 year Treasury bond was -9.98%. Let that sink in...

During that period interest rates on the 10-year T-note rose 164 basis points. From basically .51% to 2.15% . So lets look at what that means.

In general, it means that if you had purchased $100,000 in US Treasury bonds in August of 2020 you would, on paper, have bonds worth, if you chose to sell them, approximately $90,000.

OK...then what...

This is where it gets interesting. And one needs to begin to think about what they have by asking some questions. You could hold them to maturity and get your $100,000 back but does that make sense? Did it make sense to buy the bonds in the first place? Did you understand that for every $100,00 in bonds you own that you would get only $500 a year interest? Did you look at what the value of those bonds would be as inflation rose and the value of every dollar, from a purchasing perspective, would be severely diminished?

SO back to the reasons to own bonds, income, stability and safety. Every investor should examine and weigh these three issues when investing in bonds. And if you can't answer the above questions, then perhaps it makes sense to turn over your bond portfolio to a professional. If risking principal is not why you purchased your bonds then its absolutely time to look for professional advice and management. In short, there are ways to make money with bonds in a rising interest rate environment ...but its not as easy as it was when interest rates were dropping and it certainly isn't just 'buy and forget'.

Now back to the headline...after learning about the real returns over the past 18 months Ill let you answer my question for yourself...

Carey Bond Returns 3 17 2022
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