MAY 2, 2020
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)
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.”
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.
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-
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.
“Sunderland ’til I Die”