Excerpts of J.J Zhang article Bond bull is over and your choices are not pretty.Marketwatch
The start of the Fed´s tappering of the bond purchases on the following months, has brought
a sharp correction in the prices of bonds all around the world,and this will have an impact on the
wealth of many households. The smooth ending(or not) sooner or later of the accomodative monetary
policies, will bring a deep correction in the bond prices. There will be high volatility in this market,if the
Fed steps back in,and return to ease money, there will be a pause.
The longer the period with easy money,the deeper the mis allocation of resources,the greater
the correction of these distortions.
"Allocating a significant portion of your assets to bonds, particularly U.S. Treasurys, and other stable income-based assets is one of the modern investing and portfolio(safe) practices.
There are reasons and times when bonds are a good idea and essential for balancing equity risks, but that time is not today.
The 30-year bull market in bonds is almost over, if not already, and holding run-of-the-mill bonds today, particularly U.S. Treasurys, is a potential disaster in the making.
In theory, bonds are very stable (barring bankruptcy), you pay a fixed par amount, you get regular interest payments and you eventually get your principle back at the end.
The start of the Fed´s tappering of the bond purchases on the following months, has brought
a sharp correction in the prices of bonds all around the world,and this will have an impact on the
wealth of many households. The smooth ending(or not) sooner or later of the accomodative monetary
policies, will bring a deep correction in the bond prices. There will be high volatility in this market,if the
Fed steps back in,and return to ease money, there will be a pause.
The longer the period with easy money,the deeper the mis allocation of resources,the greater
the correction of these distortions.
"Allocating a significant portion of your assets to bonds, particularly U.S. Treasurys, and other stable income-based assets is one of the modern investing and portfolio(safe) practices.
There are reasons and times when bonds are a good idea and essential for balancing equity risks, but that time is not today.
The 30-year bull market in bonds is almost over, if not already, and holding run-of-the-mill bonds today, particularly U.S. Treasurys, is a potential disaster in the making.
In theory, bonds are very stable (barring bankruptcy), you pay a fixed par amount, you get regular interest payments and you eventually get your principle back at the end.
While this is true, this is not what normally happens for small investors today.
A careful distinction is that the vast majority of people are buying bond funds, not the actual underlying bonds. Like stock mutual funds or stock ETFs, bond funds are comprised of a large number of assets, in this case bonds, at varying maturities and types. When you buy a bond fund, you are buying a share of those assets.
While bonds have a set par or face value, they can trade at a premium or discount to it. As interest rates and yields change, because the yearly interest payment on a bond is fixed, the bond price has to adjust to make the bond competitive with new issues",(so it changes daily in a secondary market).
The bonds are quoted at below, equal or above nominal face value. If you sell an investment in a
ETF of Bonds, or in a Mutual Fund of Bonds, part of the investment is going to be liquidated at
prices below face value and no interest gain,making a loss for individual investors, depending
on the average maturity of the bonds. The longer the maturity the greater the loss, the shorter the
maturity the lesser the loss.
