Why It's a Bad Time for Bonds
money·@calaber24p·
0.000 HBDWhy It's a Bad Time for Bonds
The Bond market seems like it would be a pretty simple thing, you buy a bond for x amount of dollars and you get paid x amount of interest per year. In many ways the bond itself is pretty simple, but when it ends up getting traded on the open market things become much more speculative. The price that you pay for that bond either trades at a premium or a discount depending on what people think is going to happen in the market. Most long and intermediate term bonds are trading at a discount because people are trying to unload them at the moment. Why? Rising interest rates. <center>https://ei.marketwatch.com/Multimedia/2015/03/06/Photos/ZH/MW-DH153_bonds_20150306133852_ZH.jpg?uuid=13ca14ec-c430-11e4-b1fb-99640ae08ee5</center> Long term bonds have had a pretty good time for the past decade or so. What happened was after the fed announced quantitative easing and interest rates plummeted people tried to get their hands on as many long term bonds they could because the interest rates on them were still relatively high. This caused the bond market to boom and the price of many bonds skyrocketed almost over night. Those holding short term bonds ended up getting screwed and barely made any money at all, in many cases only barely outpacing inflation. We are seeing the opposite happen now with people betting interest rates are going to rise continuously. Bonds are falling in price and trading at a discount because people dont want to be stuck holding bonds that dont compensate them financially for the risk they are taking. The bonds usually trade inverse to the direction that interest rates are going and ill explain why. If you are holding a 10 year corporate bond at 3% when the treasury rates are 1%, you are being compensated for betting on a company which is risker than the US government, but what happens if rates raise to 3%. Now you are stuck holding a 3% corporate bond when treasury rates are 3% and you are taking on a ton of risk that you are uncompensated for. <center>http://i2.cdn.turner.com/money/dam/assets/150415113649-cracking-bonds-780x439.jpg</center> What I explained is basically what is going to happen if interest rates rise in the next few years. People with short term or super short term bonds will probably see their bonds and their bond funds go up in value (but they are very little risk so the interest rates are usually very low) while long and intermediate term bonds will end up dropping. Many people are holding cash on the sidelines, but the problem is you never know how much the fed is going to raise interest rates. Maybe they decide last minute not to raise them at all. If you already hold them, I wouldnt say to do anything because in the long run your funds will adjust as their older bonds finish and they cycle in new ones. However I would probably avoid the bond market for the moment unless you are going to buy into super short term funds just to avoid inflation. As for the stock market, nobody knows what will happen there, but most likely growth will slow. With companies unable to get a ton of cheap money to run operations, we will probably see a pullback eventually. Its not worth it to time the market in the long term though so continue putting money in for retirement. -Calaber24p
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