Understanding the markets this week: March 22nd, 2021

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Investing in bonds has become “stupid”?

With fears of inflation and the threat of an environment of rising interest rates (bad for bond prices) on the table, many are suggesting that bonds are a bad investment. Many market experts will go further and claim that bonds are “the worst investment ever” and that investing in bonds today is just “stupid”.

In fact, even Warren Buffett suggested in his annual investment letter that bonds a terrible investment. (We discussed this letter here on March 8th.) Buffett’s exact quote: “Bond investors face a bleak future.”

And the LinkedIn contribution by Ray DalioA respected hedge fund manager caught my eye. I strongly encourage you to read this full post. From Mr Dalio …

“The world is a) significantly overweight in bonds (and other financial assets, especially US bonds), while b) governments (especially the US) are producing tremendous amounts of more debt and bonds and other debt. … Your overweight position in US- Bonds, this is largely due to the “exorbitant privilege” that the US enjoyed as the world’s leading reserve currency and that has allowed the US to borrow for decades. The cycle of becoming a reserve currency, over-borrowing and over-indebted to threaten the reserve currency status is classic. ”

The investment world has been in a bull market for bonds since the early 1980s. It’s all we know Again from Dalio’s LinkedIn post …

“If bond prices drop significantly, it will result in significant losses for the holders of these bonds, which could lead to more sales. Bonds found themselves in a 40 year bull market that rewarded those that were long and punished those that were short. As a result, the bull market has produced a large number of comfortable long positions that have not been seriously impacted by a drop in prices. It’s one of the markers of a bubble. “

We’re not used to being hurt (or at least seriously hurt) by our bond holdings. We suffer from this topicality. We should keep in mind that bonds can change in price and carry risks. Even a traditional balanced portfolio may not produce real (adjusted for inflation) returns for several years.

Low yielding bonds offer very little return in terms of yield, even if interest rates remain somewhat stable. Obviously, on their own, bonds are not a great risk / reward proposition.

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