Should You Buy Bonds Now?

The Financial Markets are presently nightmarish for non Traders... This means preservation of capital should be paramount for most investors unless you are very young and can not foresee the use of your investment capital for the long haul.

From this perspective, Treasury and Municipals emerge as viable alternatives. However, are they?

Understand they are fixed income investments that will need to be held to maturity less the investor wishes to be subject to market price fluctuations which can lead to potential capital gains or LOSSES! Why?

Consider the rate is fixed as long as they are held but what happens if interest rates go up? This is my point... We are in a record low interest rate environment, they must and will go up going forward. How would this impact you if, let's say your fixed rate is 3%? What happens to the price of your Bonds if rates go up to say 4% down the road?

Remember, your rate is fixed. So other investors are now considering purchase of your exact bonds you may wish to sell right now for myriad reasons... Let's say you paid a price of $100.00 dollars for your Bonds. Why would a new investor pay you $100.00 for your bonds with a fixed rate of 3% when they can purchase other Bonds that are presently yielding 4% for a price of $100.00? Would you?

Of course you wouldn't, so how does the market address this? It's simple! When interest rates go up, Bond prices go down! Conversely, when interest rates go down, Bond prices go up! This is to mitigate the fixed rate of a bond to reflect the changes in external interest rates which reflect your actual yield... It is an inverse relationship.

So in our scenario, your Bond price must go down in order to get your fixed 3% rate to equal the prevailing 4% environment, hence, if you sell, you would experience a capital LOSS! The reverse could be true if one is in a falling interest rate environment with a higher fixed rate.

We know rates will continue to likely go up, barring very serious world wide difficult economic conditions, therefore, my advice would be to stay very short on fixed income investments or consider very strong Utility or very Blue Chip Equities with an historic nice dividend if you have an overwhelming need for yield or just stay in cash...

I have over simplified this scenario in order that you comprehend the inverse relationship between fixed income rates, price action and yield... I hope this has been helpful.


Glenn Radcliffe