For months now, a lot of money has moved out of the equity markets into the bond markets at a huge rate. Much of this has been driven by people's unrest with current economic events.
It is important to remember that bonds don't operate like stocks. For example, the price of a bond fluctuates based upon a number of factors including interest rates, coupon rate and maturity among others. The fancy term for this is duration. The longer the duration the more the bond can fluctuate.
Before there was the wide use of computers to calculate duration, many bond people relied on what was referred to as the bond theorems. Attached is information on the bond theorems. If you are doing bonds, especially individual bonds, it would be wise to be steeped in this information. Duration boils down the theorems into a single number and duration is only a function of where the bond is at at a single point in time. As rates change, so does duration.
As the interest rate curve has shifted downward over all maturities, the prices of bonds has increased. The amount of increase is a function of duration. Given a particular type of bond (Treasury, Corp, etc.), the quality of a bond (AAA, AA, A, etc.), maturity (1Yr, 5Yr, 10Yr, etc.), coupon (2%,3%,6%, etc.) and the other characteristics (callable, revenue), the bond price can fluctuate much differently.
With so many companies floating bonds at current low interest rates, the coupons are low. This means, given everything else being equal (characteristics in last paragraph), low coupon bonds fluctuate much greater than high coupon rate bonds with the same maturity. The risk is a 2% 5 year bond will fluctuate much more than a 4% coupon 5 year bond. If interest rates rise, the principal value of the 2% bond will decrease much more in percentage terms than the 4% bond. This is inherent in the mathematics of how bonds work.
Bonds are a different animal than stocks in many ways. There is a lot to know about bonds and this is the bare basics
The point is to be clear on the risks before jumping to the "supposed safety" of bonds. You might be unpleasantly surprised should we see a strong uptick in interest rates.
Be well read, informed and smart. Think of investing as driving down a pot holed road after a heavy winter storm. You have to keep your eyes peeled for pot holes!
Have a great holiday week.
