Ask Terry Questions Bond Investments

Bond Investments

By Terry Savage on June 05, 2014 | Investments

Terry, currently do you think bond funds are a bad investment, considering the propects of ending quantitative easing by the Fed? If so, would a person in retirement (67yrs old) would it be a good idea to investi in bond funds with a short duration? Thank you, you’re my favorite investment person!

Terry Says:  It’s hard to see how interest rates could go any lower!  Any lower and we would have “negative” interest.  And that has happened before, in the past, when money rushed to Switzerland — and the banks started charging depositors a fee to keep the money!  But such was the concern over safety that many depositors were willing to pay!

The problem, of course, with owning bonds is that if interest rates rise, bond prices fall.   So if you own a 10 year Treasury with a 2.7 percent coupon, and the general level of interest rates rises (because of fears of inflation, perhaps) then when you try to sell that bond, you won’t get your $1,000 back — unless you hold it to maturity.  Buyers will pay slightly less than $1,000 because their cash could be buying say a 3% new 10-year Treasury bond.  And if rates soar, you’d have big losses in your existing bond portfolio — or be stuck holding them (and getting a low rate of interest) while others who held cash can buy higher-yielding bonds.

So the trick is to only buy bonds when rates are at their peak!  (Yes, it’s sort of like buying stocks at “the bottom”!)

No one knows how high stocks can go from here.  Their dividends make manyof them far more attractive than bonds or “chicken money” in the bank at this point.  But there is always the concern about loss with stocks.  Well, the same with bonds.  That’s why I’ve always suggested appropriate diversification between stocks, bonds, and chicken money.

One thing for sure:  When the “smart money” starts selling bonds out of fear of inflation, or “how will we pay the debt”, you will see bond prices fall sharply.  The longer the maturity, the larger the decline in prices for bonds.  It’s painful to have money in t-bills at 0.1%.  You lose a bit to inflation every day.  But that’s your alternative for a portion of your money.



a personal
finance question