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Bonds are a healthy part of a diversified portfolio. There of course is risk to bonds. The bond market is less volatile than the stock market, which is what dra
by bkanber 9y ago
Bonds are a healthy part of a diversified portfolio. There of course is risk to bonds. The bond market is less volatile than the stock market, which is what draws most investors to them. In poor market years bonds can yield more than equity.
Bonds have a higher liquidation preference than equity, so if a company is going under you have a better chance of recouping some money. Bonds also pay their coupons on an annual or semi-annual basis and become income. Bonds can also be traded on the secondary market just like stock.
Just like equity there's a ton of downsides to bonds as well, like interest rate risk, prepayment risk, credit/default risk.
Bonds are rated by credit agencies, equity is not. In theory (though we've seen credit agencies fail time and time again), bond risk is better-understood and communicated than stock risk. Highly-rated corporate and government bonds are a good, stable place to store capital to protect against market volatility and inflation depreciation.
For instance, when the global market took a hit last year, a ton of demand for US Treasury bonds was created. Investors bought US bonds at a loss (both on primary and secondary markets) because the loss was a well-understood, small amount (something like 1-2% over 10 years), rather than the totally unknown loss that the stock market would suffer.
Junk bonds like this one are higher risk in exchange for higher yield. Junk bonds usually are issued either by companies on the way down (low confidence) or companies on the way up (no credit). If you're long on Tesla and believe they're in the "on the way up", adding these bonds to the portfolio could be a decent source of low volatility income.
This isn't advice. Just explaining why people buy bonds!
- whatok 9y agoCan you clarify what you mean by a loss here? > Investors bought US bonds at a loss US Treasuries did not have negative yields last year which is the the closest thing I would consider a loss but would depend on the context.
- bkanber 9y agoI looked at the prices again, you're right that yields on the primary were positive. Yield on the secondary however was -1.7% in April 2016, for instance. I'll update my post above to specify losses were for the secondary market. Edit: can't edit the OP anymore, so hopefully this comment serves.
- whatok 9y agoCan you link what you're looking at? It sounds like you're conflating yields with returns.
- bkanber 9y agoI don't think I am, but I could be wrong (as always). Specifically I'm talking about yield to maturity which is one kind of return calculation (just like mean is one type of average calculation). Total return can only be calculated after the fact once capital gains are factored in. Since this is a forward-looking calculation we can't do that. I'm using the term "yield", more specifically "yield to maturity" because I'm assuming bonds were held until maturity. In that situation yield to maturity should be the same as total return; ie, total return is equal to yield to maturity in the special case that there are no capital gains or losses and the bond is held to maturity. So in this case I'm not conflating them, they are the same thing. Yield to maturity is based on par value, coupon rate, term, and purchase price. The yield to maturity formula is: YTM = (C + ((F-P) / n)) / ((F+P) / 2) Where C = coupon, F = Face/par, P = price, n = years to maturity. Looking up historical data for Apr 2016 you get P = $137 (secondary) and C = 1.7%. Plug it all in and you get a yield to maturity / rate of return of -1.7%.
- whatok 9y agoCan you link what you're looking at or provide the bond CUSIP?