3/18/2023 0 Comments Start a timer![]() Here is how various types of bonds have performed so far in 2022. But if it is, it's not because bonds were cheap. And it portends some significant, not-so-obvious risks from now forward, at a time when investors seem to be treating the bond market like an early Christmas sale. Because it explains the deep drops in the prices of some types of bonds so far in 2022. That is something that investors need to wrap their heads around, quickly. But thanks to years of the Fed buying up corporate bonds, that market in particular has become toxic, and not at all what it appears to be. Think of it this way: "Junk" bonds are technically those with ratings of BB or less. That in turn brings us back to bonds as an investment. ![]() Guess what - it's "later"Ī lot of that debt was issued at floating rates, and that only worsens the reality of where the credit markets are. As for governments, you don't need me to tell you about that "spending like drunken sailors" situation. Many corporations operated with the same attitude as consumers did. But there is strong evidence that instead of treating this borrowed money as a debt, much of it was dismissed as a cheap way to spend more now and worry about the ramifications later. These low rates created an era where consumers could borrow about as much as they liked - to buy homes and cars, to get an education, etc. The result of years of low bond interest rates Furthermore, they are at risk of assuming that a drop in bond prices this year somehow puts bonds "on sale." That's not as much of a "layup" as they might think. In other words, investors are treating bonds like the safety valve they used to be for so long. Instead, what it has produced is too much complacency, tremendous confusion, oversimplification, and an outright dangerous pursuit of yield, without accounting for some massive risk-taking. It is not possible to overestimate what that combination of low and generally falling interest rates have done to create a false sense of security regarding the role of bonds in a portfolio. In fact, if we go back to the early 1980s, it has been that long since interest rates have risen with the ferocity that we have seen this year. The Global Financial Crisis that ended in early 2009 spawned one of the most fruitful and productive periods in bond market history. Since I've been around a while (36 years in the investment business) and made all of the classic mistakes along the way, perhaps I can help some baby boomers and younger folks to decipher what the reward - and particularly the risk - potential of bonds is for the remainder of 2022 and into next year. And now, when they most need to understand what bonds are and, more importantly, what they are not, the bond market might be forcing them into some critical and misguided decisions.
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