Why are bonds doing so bad right now?
Matthew Smit asked:
People aren’t buying stocks right now. And it seems nonsensical to be putting my 401k dollars in a money market fund where they will earn 0.05%. Bonds seems like the obvious safe play here with decent returns. Yet, they have been doing poorly the last couple weeks. I have a large portion of my 401k in PTTAX which is a conservative, high credit quality bond fund. And it has been going down consistently. The fund mainly invests in US Treasuries. What is the reason for the downslide?
Matthew
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Tagged With Bad People, Couple Weeks, Large Portion
Comments
5 Responses to “Why are bonds doing so bad right now?”
When the share market business - industries are down how can investment (wherever it may) get good returns? Real estate down industries down all business slow then who needs money at higher cost? and for what purpose?
A great deal of “fear” money has been flowing into bonds - especially treasuries. That drives yields down. Also, a lot a corporate debt is up for “rollover” (refinancing) in the next 12-18 months and there are concerns about credit availability.
Early in the formulation of Dow theory, there was the idea that if the Dow Jones Industrials were down, then holding the Dow Jones Transportations and Utilities (two oft forgotten averages) would protect value. But if any two or all three were down, then move your money to bonds (which is where all the smart money was before Charles Dow and Edward Jones started popularizing common stock).
Right now, that isn’t working because the perception of business is so very bad, that if the companies are being abandoned in the stock market (as opposed to simply down), which they are, then what if the companies fold completely? When it comes to liquidating a business, after employees (good old mechanic’s lien) and short term debt from suppliers, then the bond holders get paid, then preferred stockholders if there are preferred shares, then superclasses of common, then the normal stiffs like you and me get the crumbs of what is left. The bond holders have some protections (common stockholders almost none), but still, like with a business near me, the bondholders only got 40 cents on the dollar for their bonds. I think I would shy away from them too. If half the businesses are in potential trouble then about half the bond market might be affected as well. Sounds like a downward drag to me.
Many people do not realize that bonds can be just as much of a problem as stocks. This can be especially true of US Treasuries with its current low interest rates. Since treasuries currently pay such a low interest rate, this has become a speculative investment which depends more on short term capital gains than on the interest rates. A slight increase or decrease in interest rates can cause a significant increase of decrease in the bond value. In my opinion, Treasuries are not a good long term investment vehicle due to the probability of increasing interest rates in the future.
High quality corporate bonds shouldn’t currently be as much of a problem since the current interest rates are typically quite high with the current near zero inflation. As long as the bonds remain secure and safe, the investor gets a good return even though the market value may vary over the maturity of the bonds. A 5%-8% return will probably be a fairly good rate of return even if interest rates and inflation rises in the future. In my opinion, these type of investments are good long term investments but speculators also use these vehicles for short term gains,
Well, actually PTTAX invests most of its (your) money in mortgage bonds. That might have something to do with the recent decline. They are supposed to be backed by the government, but with the mortgage market the way it is who can really say how safe they actually are?