“Bond investors are the vampires of the investment world. They love decay, recession – anything that leads to low inflation and the protection of the real value of their loans.” — Bill Gross
In August 2021, I said bonds were gonna crash.
We’ve now seen bond values plummet.
The 20-year bond iShares ETF went from $180 down to about $90.
But now things have changed.
Could bonds actually be a great investment?
If you own bonds or are interested in owning bonds, then this blog is for you.
Let’s jump in!
1. The Benefits of Bonds Now
What are the benefits of bonds right now?
After years of super low bond returns, the three, six, and 12-month treasuries are returning over 5%.
As you get to the 30-year returns, the numbers go down to the 4% range.
This is called an inverted yield curve.
Short-term bonds are paying more than the long-term bonds.
The market does not think rates will not stay this high forever.
The Fed has signaled they’ll have higher rates.
They’ve come up from almost 0% to 5.5%, which is a substantial raise in 18 months.
It’s put a lot of pressure on different types of investments.
We’re actually seeing some returns after years of 0% yield in bank accounts.
As the value of bonds rises, the value of old bonds goes down.
Now, the reverse of that is true!
Currently, bond values are higher.
They’re expected interest rates will stay high, and then they’ll start coming down.
When that happens, people can make a lot of money.
If you have a 5% bond with a lifespan anywhere from 5 to 30 years, the value of that bond will increase as newer, lower-percent bonds are issued.
This gives an advantage.
Some investors who had bonds from the 80s made out very well.
Those 30-plus-year bonds were paying close to 20% annually.
That’s an outstanding return!
As the rates dropped, and bonds started paying in the single digits, those older bonds with the higher coupon rate are worth substantially more.
That’s how the valuation goes with bonds.
There’s some opportunity right now.
If you buy and only get the return, you potentially get some upside as rates drop in the future.
Bonds have a fair amount of capital preservation.
If you need less volatility, there’s no leverage in there.
In other investments, like the stock markets and even real estate, we’ve seen lots of volatility because there’s leverage involved.
When you’re looking into bonds, you should consider all aspects of the investment.
2. Why I Don’t Buy Bonds
Despite all of the positives, I don’t buy bonds.
I’m not saying you shouldn’t!
Everybody’s investment journey is different.
Everyone has different goals.
I’m 42, so I still (hopefully) have a long investment horizon.
I’m in assets that have more risk on paper, but there’s a lot more upside potential.
Those are the investments I’m interested in.
If somebody’s older, if they have more of a fixed income, they can’t handle volatility.
That makes sense for their situation.
In my experience, I’ve found that bonds typically don’t keep up with inflation.
Inflation generally goes down in recessions.
We’re currently hovering around a recession.
Most people have realized inflation is still very high.
While the Fed wants us to believe inflation is at 3%.
If inflation is 3%, then why are shorter or midterm bonds paying over 5%?
That doesn’t make any sense!
Shadow Stats has inflation between 8% and 10%.
I like to have investments that keep up with inflation.
That means my returns have to be higher than the actual inflation – so, 8% to 10%.
One of my favorite investments is the ATM machine investment that we do.
The returns with that investment are much higher than the current inflation.
I found things that will keep me ahead of inflation, and to me, those work much better than bonds.
3. The Bottom Line for Bonds
This is the bottom line for bonds.
If you are closer to retirement or in retirement, you need an investment that’s more fixed.
You have less risk tolerance, meaning you can’t handle the volatility either from a personality perspective or a timeline perspective.
There’s a preservation and a growth in value there.
If yields start dropping, you’ve got a higher rate and are locked in for a longer time.
Those could be some upsides.
Bonds are also good if you don’t know what you’re doing with investing.
Now, I’m not saying you’re not a smart person if you have bonds or want them.
Bonds allow you to diversify and give you a solid investment if you don’t know your way around the investing sphere.
Even Warren Buffet has around $100 billion invested in short-term treasuries.
It’s a good return!
You might want to have the money in an investment rather than sitting around doing nothing.
There is some wisdom there.
In regards to if bonds are the right investment for you, that depends where you fall on the spectrum.
Bonds may be good for older investors, but they won’t be for others.
They are below the rate of inflation and have lower returns than other investments.
Now I want to hear from you!
What do you think about bonds?
You may have some strong opinions.
Let’s get the conversation going in the comments.
I’d love to hear from you, because I think there is some opportunity with bonds currently.
The investing landscape is getting very interesting.
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.
Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.