Bonds Don’t Suck.

Bonds Don't SuckBanner, Link to the Real

MAY 2, 2020

 

 

 

 

Bonds

are Fa King awesome. Like losing money? Then don’t worry about bonds. Most enjoy protecting theirs. Yet no one ever launches the real bond punchline. All we ever hear is “yields dropping” or “prices rising.” Only after losing money does one truly learn to value protection, and bonds. Thus the phrase “your first loss is your best loss.” Bonds are brilliant but they’re treated like some OTC digestives.  Not here.

 

No savvy equity investor should ever rebalance or tie their shoes without firmly fixing the butt-simple bond truth. Learn that once and own it forever. Bonds are not lame and safety and yield are only a slice. It’s only the safety story that’s lame. Why “Bonds Don’t Suck.”(Photo; Ryan McGuire)

 

 

 

city, night, brige
Bonds prove as thrilling as counting cars, until you know the full story.  Things such as infrastructure are only possible through collective financing. Bonds, and of course taxes. Bonds work for investors as well(Photo; Busan, southeastern tip of Korean peninsula.)

Equity

investors are constantly confronted by the gravity well of the massive bond market.  Why?  Money loves safety.  The investors controlling money love steady income as well.  Stocks compete by offering a dividend.  Ever truly wonder why stock market news prominently features bond yields and prices?  They feature bond yields and prices because bonds are the other market competing for limited investment dollars.  Here’s what that reads like.

 

“…jobless claims are historically elevated, personal income and spending fell…Meanwhile central bank actions remain in focus….Treasury yields move lower as bond prices move higher…” On the market, 4-30-20, Schwab.com.

 

No one truly relishes a 0.3% return on their money.  Tell them that’s the total return over the next ten years and for many that conversation’s over.  That’s precisely how we’ve felt for years.  0.3% is not investing.  Only the gutless do that.  “A move to safety” is the phase used most by market news sources.  Natural question; how can being paid 0.3%(same as 0.0%) for 10 years be considered safety?  Time is opportunity cost.  By this point most news stories will be implying “capital preservation,” versus “capital appreciation.”

 

 

 

lights-890404_1280
Bonds are an old road remaining mostly in the dark for those new to the game. Those who talk about them simply assume you know the story. In actuality, bonds offer real protection and more, in times of trouble. But like everything else in the investing world, you have to buy them before the trouble, before any pressing need.

Next

the bond story usually pivots toward the corrosive effect of inflation.  The story goes that some piss-ant 0.3% yield, one no one should ever roll out of bed for, suddenly becomes a valuable hedge against say a 1.7% rate of inflation.  Right.  Thus the story so far is safety from a downside risk-poised equity market, and a promise of 0.3% “coupon,” which can be viewed as “income, ROI, or a hedge against inflation.”  We would rather own, and have, the near hapless, recidivist AT&T.  Yet the best part of bond ownership routinely remains unmentioned.  Bond prices rise, with increased demand.

 

Investment dollars constantly flow between stocks and bonds–constantly.  In simple terms the stock market is risk and bonds are safe.  Money is jumpy and safety is a product.  More importantly, moves to safety create demand on the fixed income side.  Increasing demand is that predictable market force that pushes all prices up.

 

 

 

laundry-413688_1920
Like everything else, when people really want something, prices heat up.  Think gougers and N-95 masks. The more threatened the equity market, the more demand for the “safety”of fixed income and bonds. What no one ever seems compelled to add is that the appreciation in those bond prices can be truly astonishing. Think growth stock strong.  Forget about the puny yield.  Owning bonds serves both as a net for  trouble, one that may pay off big. It’s the price appreciation, in a place of safety, that can really create the love(Photo; one of our favs, Ryan McGuire.)

Bonds

are initially offered in “auctions.”  Market dynamics are at work from the start.  Few are held to maturity, corporate of governmental.  Just like stocks, bonds are sold back into the market, referred to as the “secondary” market.  In the secondary market bonds sell either at a “discount” or a “premium.”  That means that buyers pay more, or less, then the face or “Par value.”  The point?  Savvy bond investors just profited hugely by anticipating the latest equity market turmoil, and move to safety.  How?  They purchased bonds before the massive rush out of more risky stocks and into the relative safety of bonds.

 

 

$5000.00 30-year treasuries have recently been selling in the secondary market for thousands above their $5000.00 face value.  We’ve noticed treasuries with as little as five years remaining to maturity selling above $7500.00.  That’s growth stock-like price appreciation. 

 

We’ve just witnessed one of the most dramatic market events in generations.  Bond prices are sky high, thus yields are at historic lows.  That’s been reversing some very lately.  Yet the point is the dynamic.  Bonds represent much more than “safety,” or the payout, referred to as the “coupon.” 

 

-Basic Bond Dynamics-

bonds
Bonds feature two fixed elements, the “Par” and “rate,” and two floating elements, current price, and yield. When in demand bonds sell at a “premium” to par, the “yield” drops, because the “rate” is fixed. That’s it.

The

boring bond story about safety, or capital preservation, inspires no one.  Market news doesn’t tell the above appreciation story.  30-year treasuries with only 5 years remaining until maturity have been selling recently for more than 50% above par, or face value.  That means a $5000.00 par value pricing at $7800.00.  That level of appreciation is however unusual.

 

The facts remain.  Bonds are much more than a 0.3% nothing yield.  Amid serious macro turmoil, when buying treasuries rather than corporates, you get all that relative safety and rate for free.  We had to learn that on our own, which is precisely why we wrote this.  Bonds also act as portfolio ballast in all times, and more so amid heightened volatility.  But you have to own them before the trouble begins, at a price.  As always, good luck and good investing.          

 

 

 

Pick-of-the-Day

“Sunderland ’til I Die”

Netflix

Sunderland
Passionate slice of life sports documentary exposing the feelings of a fallen former ship-building power economically darkened.  Football club Sunderland struggles following “relegation” out of Britain’s glittering Premier League.  Players, team personnel, and  supporters strain to return the club to former form as an emblem of dominance and a symbol of hope for a hardened northeastern industrial city.  Netflix.

 

 

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Additional resources:

Investopedia.com.  Seriously Wonderful.  Fact.
http://www.investopedia.com/
Charles Schwab.  In Our Opinion, the best broker going.
https://www.schwab.com/public/schwab/client_home
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Be careful.  Do the work.  Have patience, with yourself.  Never put your dreams away.

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