Tuesday, 4th June 2019
On the retreat….
Bonds are pretty dull fare….
The character Jared Vennett (played by Ryan Gosling) in the film The Big Short summed it up better than I can….
‘If banking was boring, then the bond department at the bank was straight up comatose. We all know about bonds. You give ‘em to your snot-nosed kid when he turns 15; maybe, when he’s 30, he makes a hundred bucks. Boring.’
But boring or not, the bond markets are sometimes instructive….
They sometimes have something important to tell us….
And now is one of those times….
- First, how bonds work….
Before we get into the nitty-gritty, it’s important to understand how bonds work….
I’m no expert, but here are the basics we need for our purposes today….
When you buy a bond, you are basically lending the bond issuer money. You buy at the current price and the lender pays you what is called a yield – like interest….
For the purposes of this column today, the important bit is this: the yield of a bond is inversely related to its current price. If the price of a bond falls, its yield goes up. If the price of a bond goes up, the yield falls….… Click here to read more