Bond Market Math (Part 1)

How can bond buyers make money?

Since 1981 bond investors have had the wind at their backs. Not only could they collect their periodic coupon payments, but as rates fell the market value of their bonds would rise. If investors wanted to, they could sell 10-year bonds 5 years after buying them and usually pocket a nice capital gain.

In spite of periodic sell-offs, outperforming an index was fairly simple: go long. Lower discount rates would cover a multitude of errors. The rising tide of lower rates would deliver market value gains that would outweigh any errant security selection.

But those days are over. Economic growth is rebounding around the world. Europe is emerging from recession; Japan is reflating; China is moving into the second year of its five-year-plan, and the US economy continues to grow in spite of Washington’s follies. Inflation expectations are muted for now, but with global central banks brimming with reserves, the risk is now be towards higher inflation. There is still much that we do not understand about the global economy.

So be ready, investors. The arc of the bond universe is long, but it now bends towards higher rates.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2013-10-03T10:08:50+00:00 October 3rd, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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