Growing up on the bond side of the business wasn’t always easy. There was never any snappy cocktail party conversation about what’s going on in the bond market like I often overheard on stocks…go figure.
With the high level of the stock market and an aging population demographic, my how times have changed. The bond market looks mighty interesting to a lot of folks. As a $38 trillion global bond market (vs. the S & P market cap at $18 trillion), I’m glad to see it’s not being totally ignored, but I am concerned as well. A lot of people these days view bond funds as a placeholder to park cash, like a money market vehicle with return, unaware of the downside risks. Bond funds are especially susceptible to volatility and erosion when rates rise (and, oh by the way, rates will rise at some point).
When interest rates rise, it erodes the value of bonds. A bond funds’ value, unlike money market funds, will go down. The double-whammy on bond funds happens when the funds holders see their “safe” money go down in value and head for the exits and begin to sell the bond fund. The bond fund manager is then forced to liquidate the underlying bond holdings to keep up with liquidation requests, further impacting the existing bond fund holders. (UGH! It could get really ugly.)
When you hold individual bonds, there will be swings in the prices and market values. The benefit is that when you hold individual bonds, at the end of the day or when each bond issue matures, you get your face value back.
Learn more about the hidden risks and costs of bond mutual funds. Download "Bondmaggedon: Be Afraid...Very Afraid" and discover five critical strategies that we consider when constructing a bond portfolio.