What happens when the so-called “safe” part of your portfolio loses value? That’s the conundrum that diversified investors are facing, as they confront this year’s drop in b…
A bond purchase is essentially a loan to an entity, which can be a government, a state, a municipality, or a company. The loan is established for a predetermined period , at a fixed rate of interest Borrowers are on the hook for interest payments, either at periodic intervals , or at the end of the agreement, when they repay the obligation in full.
Bond prices are best understood with a simple example. If you purchased a 10-year U.S. government bond that paid 1.6% a couple of years ago, it will be worth less now, when new bonds issued by Uncle Sam are paying almost 3%. Conversely, if you owned a bond that is paying 5% and your friend can purchase a new bond at just 3%, your bond is more valuable today than the prevailing bonds she can purchase.
Make no mistake: the 2022 bond market drop has hurt. The Bloomberg Aggregate Bond Index tumbled 6.6% in the first quarter of the year, its worst three-month stretch since 1980. In general, riskier bonds and those with longer maturities fared worse, while higher quality and shorter-term bonds did better, but at the end of the quarter, no bond investor was pleased.
Before you bail out of your bond positions and stash the proceeds in cash, stocks, or crypto, remember that even as bond prices drop, interest on the bonds within the mutual fund should continue to make interest payments.
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