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The Bond Market is Dead

The Bond Market is Dead

March 28, 2022
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In June of 1979 I had just scraped together $5,000 after my first year at EF Hutton so I decided to by my first municipal bond.  I selected a Portland General Electric Port of Morrow, Oregon, 6%, due 30 years out, at par or 100 cents on the dollar.   With the subsequent inflation and interest rate run up to the 1982 real estate market crash, I wanted to raise some cash to make an investment in the depressed housing market.  Keep in mind, I was in the investment business so I knew the fair value of bonds.  When I went to sell it, I only got 60 cents on the dollar on that bond.  My $5,000 had turned into $3,000 on an “A” rated, quality tax free bond. 

This was my first and best lesson in what inflation and rising interest rates do to bond values.  I am not suggesting that interest rates will climb to where they were in 1982, but then again, 30 year “A” rated tax free bonds are currently yielding around 2.35%, not the 6% income rate I got at par back then.

Even with the small jump in rates these last few months, 30 year bonds whether municipals, or treasuries, have lost about 10% of their value.  That means your “safe” investment grade $5,000 has become $4,500.  If interest rates continue higher, you will lose more in your bond portfolio.

Bonds have been in a 40-year bull market, which means a lot of investors, and trust department portfolio managers that are long bonds have never been seriously stung by a price decline.

Bridgewater Associates founder Ray Dalio, in a LinkedIn post title “Why in the world would you own dollar debt”, said the “Economics of investing in bonds have become stupid.”  He also says “The bond market is dead”

Think about it.  If you buy a current 10 year U.S. Treasury bond yielding 1.72%, your upside is ONLY 1.72%.  Your downside is if interest rates go up at all, which is what the Fed is telling you is going to happen, your principal may be under water for the next 10 years.  The potential return versus the potential principal risk here is not in your favor.

If you hold your investment portfolio at a bank, a trust company or department or a brokerage, take a look at what you’re invested in.  Chances are you have a chunk of your money (at your traditional advisor’s recommendation) in low yield bonds that will be under water from here on if interest rates continue to go up.

There are all sorts of liquid investments that provide an income yield more than what bonds offer and are built to flourish in inflationary times.  How many of these do you hold instead of the low yield principal risk bonds in your traditional portfolio?  

What I’m suggesting is that what has worked for the last 40 years may not work in the future.  The seven most dangerous words you may hear back from your advisor are “that’s the way we’ve always done it”.  If you have questions or need a second opinion on your portfolio, let me know.