3 Reasons Why the US Bond Market Will Not Crash Anytime Soon

 In Bond Investing

bond market

There’s been a lot of hoopla in the past few months about the looming bond market crash. You can stop stressing about it right now. It’s not going to happen, at least not anytime soon.

In fact, the bond market is healthier than most other investment options and may be the safest solution for investors seeking a return as recession looms on the horizon. Not convinced?

Let’s take a look at three reasons why the US bond market isn’t going to crash and burn just yet.
Bond Investing Fundamentals

The “Reasoning” Behind the Talk about a Bond Market Crash

If you’re like most investors, you’ve been keeping an eye on the financial news, as well as the opinions of movers and shakers out there.

Most have taken a negative stance on the bond market because, right now, bond prices are high due to the fact that non-US central banks have negative yields.

The bond bubble is going to burst, they claim. In comparison, US bonds have a low (but positive) yield.

However, the thinking goes that once those other central banks start to ease asset purchases, things will reverse. They predict that the price of bonds will plummet, that the demand will evaporate, and that the entire situation will change.

Is that actually going to happen? No, says Société Générale strategist Albert Edwards.

In fact, Edwards is predicting that the US bond market will keep going strong in the months to come. With that being said, he does understand the worries of today’s investors.

It’s the prospect that quantitative easing will be significantly reduced soon, as well as the opening up of more bonds in the supply that are bothering investors.

However, as the chart below indicates, the bond market is still intact.

bond market

Edwards is not only in disagreement about the looming bond market crash but actually predicts that it will improve.

He points out that the possibility of another worldwide recession will encourage more and more people to get into bonds, and that quantitative easing will not slow, but actually increase due to the prospect of a recession.

He stated, “In the next recession, I see both more fiscal expansion and more QE. I expect US 10-year yields to converge with Japan and European yields, at around minus 1% in the next recession.”

Edwards backs up his projection with proof – investors who’ve expected bond prices to plummet and prices to rise within the past three decades has been dead wrong.

A quick glance at any timeline showing historically predicted bond performance will show yield drops instead of gains.

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The Looming Recession

Chances are good that you remember the results of the Great Recession well. Many investors lost it all, or sufficient to make it nearly so.

Could those gloomy days be about to return? Albert Edwards definitely thinks so.

In fact, his thinking mirrors that of other analysts who point out that not only is a recession about to rock the world’s financial markets but that we’re actually smacked in the middle of a massive downturn that will take decades from which to recover if recovery is even possible.

However, that doesn’t necessarily mean that everything is bleak. In fact, Edwards thinks that if other assets drop, then bonds will rise even further, providing an even more significant return and perhaps the only place of safety for investors.

After all, investors will still need to find a means to safeguard their wealth and grow it, and if stocks and other assets are not worth their time, they will turn to bonds.

Corporate Bonds to the Rescue

Now, it should be noted that not all bonds are created equal. Government debt is crushing and only growing more so. This is true in the US, Germany, Japan and around the world.

Returns on government bonds are low, as well. Where does that leave investors? What safe haven might they turn to? The answer is corporate bonds.

With high-quality corporate bonds, investors are able to get out from under the specter of government debt. Instead, they can put their money into supporting companies with a guaranteed return on their investment.

So, not only will the bond market not collapse, but investors have an even safer and better-returning option in which to invest.

One of the most significant benefits of investing in corporate bonds is that you are able to benefit from predictable returns. You know exactly when you’ll receive your return, as well as how much that return will be.

This is crucial for those planning for retirement, as well as those already in their retirement years.

That predictability allows investors to get away from the boom or bust cycle of the stock market (which is moving to a bust-only drop) and actually create an investment plan that will grow their wealth over time.

Called “bond laddering,” this method allows you to purchase bonds with specific maturity dates. Each maturity date is another step on the ladder, moving you farther into the future (along with expected returns at each ladder rung).

So, even if the naysayers have glimpsed a partial truth, that does not have to be the reality for bond investors. There is a better choice, one that will not only safeguard your wealth but help you weather the coming financial storm in safety and comfort.

No, bond investing will not get you rich quickly. It’s a slow, steady growth market, instead.

With that being said, growth without any flash-in-the-pan results is still better than negative growth, and protecting your wealth will be even more important when the stock market reaches its inevitable trough.
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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