Why 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.
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.
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
Nice post, although I am much more bearish on economy overall. Ray Dalio said that bonds are in bear market and many believe that they are in bubble. Regarding stock market, I think it is in "la la land" and eventually will correct to fair value which is much lower than now, like much much lower:).
Its really hard to tell but I tend to agree that a correction will soon be coming and we might see a bit of a recession. I dont think it will be as bad as 08 though.
Very good points. I had some money in bonds for the past 5-6 years and will be taking it out and putting it into something with a brighter future soon, maybe more Steem Power!
Thanks for the post!
I completely agree. Only full and feds are buying bonds at this time. Not only does the US owe, by far, the greatest amount of debt ever accumulated by a single nation in human history, but $21 trillion is, if I’m correct, larger than the debts of every other nation in the world combined. As far as I know China is the largest buyer and owner of US Treasuries/ bonds in the world. And if the largest buyer and owner of those bonds is saying “no more US bond buying” well then that is a big problem. Because who is going to step up and replace the Chinese?
Im less concerned about our debt as a whole, but rather our deficit that we are running. I think the government needs to try to run a surplus or as close to breaking even as they can or our credit will lose value.
What do you feel is the better long term buy, dividend paying stocks with growth potential or bonds?
Im not really sure at this point in time. Were in a weird place. I think if you are saving for retirement, I would just go with a growth or blend large cap fund or etf mixed with some midcap and small cap. If you are older you still want to throw bonds into the mix with something like a total bond fund. In the long run it wont really matter. If you are close to retiring I would talk to a professional so they can best gauge the situation.
Hey buddy, if am not wrong, you are on Youtube too?
Im not at the moment, other than a few gameplay videos. I was thinking of starting a youtube channel in a month or two when I move and have room big enough for a setup.
Oh seems like I have mistaken you for someone else.
Best of luck with that :)
Good post, I am a photographer, it passes for my blog and sees my content, I hope that it should be of your taste :D greetings