(OT) Bonds for Blondes

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Bonds are selling like crazy so that puts the yield down? I have read every single bond post I see on this board, but just do not get it.

I have 20k in bonds right now in my 401k. Should I move it out?

Don't get it, appreciate your help!


(Not a real address)

-- Lurker (Lurking@Idaho.com), February 07, 2000



While you're at it, contact your financial advisor and review your long terms plans, face-to-face.

Remember, you get what you pay for.

-- (kb8umw@yahoo.com), February 07, 2000.

Bonds have an inverse relationship to yields. In other words, if bonds are up, interest rates are down and vice versa. If bonds are selling (as in selling off -- or going lower) yields are going higher. Bonds are, and have been for more than a year now, a very nasty place to be. In an environment of increasing interest rates, bonds (as an investment) lose money.

-- (cashtradr@aol.com), February 07, 2000.

Bonds and bond funds are slightly different things. I found this out to my surprise about 15 years ago. My mother in law wanted to have a safe IRA and I got her into a US Gvt bond fund. Interest rates went up and the value of her IRA went down. Learned a lot since then.

Bonds are one of the BIG tools the gvt uses to to manage the economy. So gvt bonds are subject to manipulation. If you think interest rates are going to go up (I do), you do not want a bond fund IMHO.

I intend to be real defensive till this Y2K thing, INTERNET stock bubble, Euro/$/gold currency war, and election year end.

50% Money market

15% Gold mining stocks

20% Oppenheimer real asset (commodities)

15% employer stock (can't do anything about it)

-- ng (cantprovideemail@none.com), February 07, 2000.

When interest rates fall, the capital value of bonds already in hand increases. For example, say you bought $1,000 of bonds paying 6%. If interest rates fall to 5%, $1,000 worth of bonds gets you the new rate. However, your 6% bonds are now worth $1,200. In this way, their interest payments are "normalized" to the prevailing rate. (5% of $1,200 = 6% of $1,000)

-- Chris Tisone (c_tisone@hotmail.com), February 07, 2000.

When a bond is issued, it has a face value and returns interest on your principal at a fixed rate. The issuer of the bond receives the face value (as a loan) and pays the interest to whomever holds the bond. Then, when the bond matures, the issuer returns the principal to the holder. There is no yield, per se, just principal and interest.

"Yield" is all about the secondary market for bonds. Suppose you own a bond and you need the principal back. As a result you want to sell it to someone else before the bond matures. You've already received X amount of interest, so you're selling the remaining interest and the principal. How do you figure out what to sell it for?

Well, a buyer is going to expect that your pre-owned bond will give him as good a deal as he could get from a bond issuer on a brand new bond. Otherwise, why buy yours, right? Suppose the bond issuer is giving higher interest these days on the new bonds being issued? But, your bond is stuck at the earlier, lower rate of interest. What to do?

Simple. You knock enough money off the selling price to make up for the lower rate of interest your bond pays. Now your bond "yields" the same as a new bond that pays higher interest. In order to give the buyer this deal, you had to lose some money off the face value of the bond. Sorry. Your only alternative was to hold the bond to maturity. If you want to sell, you have to take your lumps.

Suppose interest rates have headed down since you bought your bond. Hey! Great for you! Now your bond can fetch *more* than its face value. You can make more money than you paid for it, if you decide to sell it. (You're no chump. You don't give it away!) Or, you can keep your bond and earn higher interest than the market is currently paying. Either way, it's a win for you.

So, as prices for bonds move up, their yields go down. And vice versa.

-- Brian McLaughlin (brianm@ims.com), February 07, 2000.

It's interesting that the current Fed approach of bumping up rates gradually has been hurting two areas -- bonds and fundamental value companies -- without laying a glove on the real source of "irrational exuberance": techs. Nasdaq has resumed its climb, while bonds and the poor ol' Dow industrials continue to sink.

Mr. G is in a pretty tight spot now. Techs currently refuse to respond to Fed rate hikes, but other sectors, rather like innocent bystanders, are getting whacked hard. Absent a slowdown in tech prices, that much-desired "soft landing" ain't gonna happen. Nasdaq will make a "Wile E. Coyote" whistling sound when it finally heads for the canyon floor.

Anyone else catch that comment about inflows this AM on CNBC? One talking head commented that gigabucks in funds had flooded into the system in the last couple of weeks, and consensus seems to be that much it is heavily margined. Hey, Mr. G! Tighten up just a smidge on margin requirements and watch what happens to techs!

Naaaahhh. Too easy...

-- DeeEmBee (macbeth1@pacbell.net), February 07, 2000.


This link takes you to the SmartMoney bonds section. This page is a great explanation of the recent "Yield curve inversion" and why/how it happens. I hope the other links from that page will help you understand bonds better.

An earlier reply mentioned the difference between bonds and bond funds. Bonds: If you own a bond, you are locked into a certain interest rate. Your bond may go up or down in value, but it will pay face value upon maturity. The interest payments stay the same. It's a bit like locking into a 30 yr fixed mortgage. Bond fund: The bond funds are different because managers are always trading, hoping to get a better yield for the investors. You can bet your 401K fund managers are right now trying to predict which way to jump in the bond market. Good Luck!

-- Heckie (hlujan45@aol.com), February 07, 2000.

Thank-you all. I read every stock and bond related article I can find here and elsewhere. (I am my own financial adviser) and based on what I read here I moved 80% of my money into a "stable value" fund and 20% into a bond fund right before the rollover, thinking the market would surely tank.

That first week the market shot up! Boy was I mad. But by the end of Jan allmost every stock fund I had previously been in had lost a lot. (S&P 500 type, balanced fund (stocks and bonds), one agressive stock fund).

These are all company picks - I have no choice except which fund I put them in, and which percentage. The "stable value" fund has been doing okay so for the time being I will probably just put all the money in that. I am still not so convinced everything is beautiful in Y2k and oil land, let alone the stock market. I personally will probably wait until at least March or April to get back in and then of course waiting for a dip to get back in.

So to make a long story short, yes you can really get some valuable advice here but you need to keep an open mind. Thanks all!!!

-- Lurker (Lurking@Idaho.com), February 08, 2000.

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