Bond Yields Send An Economic Warning

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Zero Hedge: If you don’t understand what bonds are and what they can do for your portfolio, you may be missing out on something really big. And not just if you’re a retiree either.

Why Bonds Correlate To Economic Growth & Inflation

As stated in “bonds are not overvalued:”

“Unlike stocks, bonds have a finite value. At maturity, the principal gets returned to the “lender” along with the final interest payment. Therefore, bond buyers are very aware of the price they pay today for the return they will get tomorrow. As opposed to an equity buyer taking on ‘investment risk,’ a bond buyer is ‘loaning’ money to another entity for a specific period. Therefore, the ‘interest rate’ takes into account several substantial ‘risks:’

  • Default risk
  • Rate risk
  • Inflation risk
  • Opportunity risk
  • Economic growth risk

As noted, since bonds are loans to borrowers, the interest rate of a bond is tied to the prevailing rate environment at the time of issuance. (For this discussion, we are using the 10-year Treasury rate often referred to as the ‘risk-free’ rate.)” Read More

 

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