I’ve recently been thinking about the implications of the “low-risk safe haven” bond market and bond fund investors losing a lot of money in those investments in the years to come, and the bond market (bonds and bond funds/ETFs) losing its “low-risk safe haven” status due to the presence of multiple risks to include:
1. The United States debt continues to grow and is approaching unsustainably high levels.
2. There has been a “buyers’ strike” over the past few months which is likely to continue. Fewer buyers mean bond yields rise (and bond prices fall). For example, foreign investors have greatly decreased their purchases of U.S. Treasury Bonds. Buyers’ strikes reflect a low confidence in the abilities of the U.S. government being able to service its debts resulting in a hesitancy of investors to buy bonds (government, municipal, and corporate) and bond funds/ETFs.
3. If at any time during Treasury Bond auctions (which usually happen several times a month), there are not enough buyers, then the Federal Reserve will probably need to “print money” to buy up the excess to prevent yields from spiking more than they otherwise would. “Printing money” tends to have an inflationary effect, and inflation tends to cause longer-term bond yields to rise (and bond prices to fall). Please understand that as debt grows, debt auction sizes increase – so the risk will continue to grow over time until the debt issue gets resolved (if ever).
4. Once they start experiencing substantial losses, existing bond holders are likely start selling their holdings which would make bond prices fall even further (and bond yields increase even more to entice new buyers).
5. The U.S. defaults at some point on one or more payments owed to Treasury Bond holders. The experts say this will never happen, but if it ever does bond yields will spike (and bond prices will crater).
6. The combined effects of the above risks are likely to put even greater upward pressure on bond yields (causing bond prices to fall) – creating a negative impact to the overall economy and government, corporate, and consumer finances.
In summary, the above risks are likely to result in substantial increases in bond yields (and bond price drops), higher inflation, and a deteriorating economy and government, corporate, and consumer finances due to the combination of two or more of these risks. So, as a low-risk investor, I will definitely be staying away from the Treasury Bond Market for a while (especially longer-term bonds, and particularly Bond Funds/ETFs – instead opting for cash drawing interest for my lowest risk holdings).
For those who don’t know the difference between bonds and bond funds/ETFs, here’s a brief summary:
A. Bonds pay yields on a regular basis and you get paid back the principal at the maturity date.
B. Bond Funds/ETFs have no maturity date so anything you invest is subject to losses if you sell when the prices are low.
So, you can potentially avoid losses for option A by holding the bonds until the maturity date. The primary exception would be if there is a default on those bonds and bond holders are only given a fraction of their principal back – this rarely happens but could. The only way to avoid losses for Option B is to sell when the prices are above what you initially paid – you can do the same for Option A. Many people are already invested in Option B because several “set it and forget it” retirement options such as target-date funds invest a portion of the money into Bond Funds/ETFs.
Now, I do presently own bonds that I purchased previously which mature within 3-5 years and pay a good interest rate. So, I plan to hold those until maturity unless an unforeseen event causes yields to drop (and prices to rise) substantially. However, I will not be buying any new Treasury Bonds for a while (especially longer-term bonds, and particularly Bond Funds/ETFs – instead opting for cash drawing interest for my lowest risk holdings).
I wrote a similar post about the bond market back in January 2021 and those that heeded that post avoided a 46% loss – something which is very unusual for the bond market, historically speaking, when considering its longer-term history as a low-risk, safe haven investment – these losses are more typical of a stock market decline than a bond market decline.
So, these are some of the dark clouds I’m again seeing on the horizon. Lots of things to ponder and position for – especially since the perceived, historical, low-risk investments might actually become high-risk investments in the years to come. So, as a low-risk investor, I will be staying away from the Treasury Bond Market for a while (especially, longer-term bonds – and particularly Bond Funds/ETFs) – at least until there is a substantial spike in yields.
You can learn about all of my investing techniques via my “Invest Like a Pro in 10 Minutes a Day!” series of 4 books where you can learn the “end to end” process to investing. So, use any downtime you might have to your advantage by gaining this knowledge and learning these skills and techniques (https://brighterdayslifecoaching.com/published-books-and…/).
Also, you can read all about my stock market activities here: https://brighterdayslifecoaching.com/stock-market-activities.
The bottom line is that the Treasury Bond Market appears to be high risk right now (especially, longer-term bonds – and particularly Bond Funds/ETFs) – which means significant losses could be experienced by bond market and bond fund investors in the years to come.
You can learn about all of my investing techniques via my “Invest Like a Pro in 10 Minutes a Day!” series of 4 books where you can learn the “end to end” process to investing and gain key investing insights and skills (https://brighterdayslifecoaching.com/published-books…/).
Also, you can read all about my stock market activities here: https://brighterdayslifecoaching.com/stock-market-activities/
I wish you much success in creating a brighter financial future for yourself, your loved ones, and those who follow!
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