3 Things You Should Do in the Midst of a Bond Bubble

 In Bond Investing

bond bubble

Bonds have been a go-to solution for investors for a long time now, but the signs that the bond bubble is about to burst have become incontrovertible.

Pundits from John Stepek to Matt Whittaker have pointed out the situation.

The position is bad, and getting worse for those who’ve put their money into government bonds.

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The Bond Bubble Today

To find signs of the bond bubble, you need to only look at the way global, national debt trades – it moves on negative yields today, to the tune of more than $10 billion.

Germany is a prime example of this situation, with the nation’s average yield now below 0% for the first time ever. In effect, it costs investors money to buy German bonds, meaning they actually have to pay in order to lend the government money.

The same is true for Japan, and Italy is in the same boat.

Consider the words of John Stepek, writing for MoneyWeek. “Growth is over,” he says. “Debt is crushing our economies. Inflation seems impossible to come by.” He goes on to say that, “Central banks are there as the buyers of last (and often first) resort.If you bought bonds this year, it doesn’t matter about what happens when they mature – you’ve done well on the capital side, particularly if you played the currency right.”

He cites the rise of German debt (4.2%), as well as Japanese bonds (5%) and notes that buying in with a weakening currency to maximize gains. The result – the appearance of strong performance. For too many investors (and economic commentators), that acts like a set of blinders, blocking out the reality of the situation.

Bubbles, he mentions, last longer than they should, and often, investors and pundits alike try to ride the train until the very last minute, ultimately losing their investment in the process when the bubble bursts.

What You Should Do to Protect Yourself from the Bond Bubble Burst

So, where does that leave investors?

In many cases, it means you’ll be holding the bag. It doesn’t have to be that way, though. Bond investing doesn’t have to mean buying government debt. It can mean purchasing US corporate bonds instead.

Claire Boston, writing for Bloomberg, states, “Yield-starved bond investors from around the world are starting to pile up at the doors of Wall Street’s corporate-debt underwriters,” and that’s for some very good reasons that tie into three steps you should take to protect your wealth in the face of the growing bond bubble.

The most important reason that investors love US corporate bonds is that they can actually offer a decent return. For example, investors who bought 30-year debt contained in the Anheuser-Busch InBev offering at the beginning of 2016 would have earned an unheard of 20% on their initial investment.

Consider the fact that while corporate debt accounts for only 12% of the investment-grade bond market value, it accounts for 32% of bond income, and that’s a 12% increase over the past ten years.

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Buy High-Quality Investment Grade Corporate Bonds in the US

The first thing to do is to ignore government bonds. Yes, they can be tempting, but as the bubble continues to grow and expand, so does the risk.

With interest rates still low, yields will remain virtually invisible. Instead, opt for high-quality investment grade corporate bonds in the US.

There are many differences between government and corporate bonds, including the fact that the latter actually offers growth and profitability, while the former will ultimately cost you money.

Buy Bonds and Hold Them Until Maturity

Buy bonds and then hold them until they mature.

This is one of the single greatest advantages at your disposal.

Do not trade bonds, as you run a significant risk of losing most of your investment potential this way.

By holding bonds, you’re able to continue to collect returns over time.

Buy Individual Bonds, Not Bond Funds

Unlike bond funds, actual individual bonds have a maturity date that can be planned for. You know that you’ll earn $X on Y date, and you can work that into your long-term financial planning. This allows you to plan well ahead for life goals that range from paying for your child’s college education to retirement and everything in between.

Despite the bond bubble, you will find that this investment option still provides significant advantages over the stock market.

For instance, bonds don’t suffer from the constant fluctuations that plague stocks, and which could reduce your investment value to $0 overnight.

Another reason to put your money in bonds, particularly in corporate bonds, is that unlike stocks, bond yield actually improves as company performance decreases.If you put your money into a company’s stock and that company began to experience problems, their stock price would plummet.

However, with bonds, the return increases. This is due to rising risk. The higher the risk, the higher the return on these investment options. So, even should a company begin to founder, you can still earn.

Finally, by creating a bond ladder and combining bonds with different maturity rates, you’re able to create a long-lasting shield for your wealth while enjoying returns over time.

Simply put, a bond ladder is nothing more than a portfolio of bonds that mature at staggered intervals, giving you a constant stream of returns. You could easily plan for three, five even ten years in this way.

When everything is said and done, the bond bubble is real.

And it will burst.

When it does, the only safe haven for your wealth will be high-quality US corporate bonds.
Bond Investing Fundamentals

Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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