Bonds: so, this is bad?

[gcgang]

I've read a lot about the "carnage" in the bond market. While I don't particularly like bonds (I mostly agree that bonds are for getting out of jail, as one equity manager said years ago), it really doesn't seem that bad to me.
Barclays US Aggregate Bond Index, although on pace for its worst year ever according to an article in Investment News July 15, having just its third down year since 1976, is only down 2.71%. 1994 was the worst they cite, having been down 2.9%.
Seems like there must have been worse years than that.
So, this is bad?

[jflynn4]

Hope I'm answering the right question (at least from my viewpoint).


I personally got heavy into bonds right after the crash when I was able to buy at a discount. When I did, I locked into a large amount of long term corporate bonds that have yields ranging from 6 to 8%. For example, I own a number of Disney bonds that have a face rate of 7% but were bought at a discount and don't mature (no calls) until the late 2030's.

I think, when talking "bonds," there has to be a definite distinction between government and corporate bonds. As someone looking for "income" rather than capital appreciation, having long term ("guaranteed") returns in the 6% to 8% levels on investment makes much more sense than trying to "hope for" regular 6% - 8% returns in the stock market.

I know that, today, those rates aren't available except through junk so I'm not suggesting going that route. My point is that bonds are not inherently the wrong investment for the long term. I've never understood why (when rates DO return to more normalized levels) why it is anything less than smart to lock in a portfolio of large company bonds at decent, maintainable yields, rather than investing for potentially higher returns in the general market.

[haha]

Seems to me that for a retired person which I assuming that you are, this makes very good sense. The only risk I can see, and it seems remote currently, is runaway inflation putting interest rates way up.

BTW, excellent timing!

As to the OP comment about minor losses in a supposedly bad year, this is clearly true. This loss would not even be noticed in equities. One possible difference is that bond bear markets will at times last a very long time, and the overall losses can become quite large. So when compared to normal returns form bonds they do not seem to balance.

Ha

[jflynn4]

Runaway inflation is a concern but that would be the case regardless of where you are.


In terms of retirement, yes, I am (retired early at age 58 almost two years ago). But my point was that the Conventional Wisdom is that "bonds are a bad thing for long term." If done right (and with a little bit of luck), a properly managed corporate bond portfolio delivering a consistent 6-8% return (which we will see again) makes as much, or perhaps more, sense than riding the ups and downs in the market hoping for a better return.

[haha]

Quote:

Originally Posted by jflynn4 Runaway inflation is a concern but that would be the case regardless of where you are.

Sure, it is bad news for most assets. But not all, and of those affected, not many are as negatively affected as long term bonds.

Ha

[clifp]

Quote:

Originally Posted by gcgang I've read a lot about the "carnage" in the bond market. While I don't particularly like bonds (I mostly agree that bonds are for getting out of jail, as one equity manager said years ago), it really doesn't seem that bad to me. Barclays US Aggregate Bond Index, although on pace for its worst year ever according to an article in Investment News July 15, having just its third down year since 1976, is only down 2.71%. 1994 was the worst they cite, having been down 2.9%. Seems like there must have been worse years than that. So, this is bad?

I would have guessed that during the 70s when 10 year Treasuries were up 5% in a a couple of years, bond market loses would have been worse.


Still it is all about the risk/reward ratio. The upside to bonds with their pathetically low yield of 2-2.5% the last couple of years was very limited. A far cry from most years were you were getting paid 5-6% to hold them.