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https://fa-mag.com/news/the-most-powerful-buyers-in-treasurys-are-all-bailing-at-once-70058.html?section=3Everywhere you turn, the biggest players in the $23.7 trillion US Treasuries market are in retreat. From Japanese pensions and life insurers to foreign governments and US commercial banks, where once they were lining up to get their hands on US government debt, most have now stepped away. And then of course there’s the Federal Reserve, which a few weeks ago upped the pace that it plans to offload Treasuries from its balance sheet to $60 billion a month.
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Stocks do generally “recover”, although the amount of time to recoup losses and get back to par value can range from days to many years. Depends a lot on how fairly priced they were when purchased. So, stocks bought at a very hefty price will take longer to recover.
Bonds are a very diverse asset class. If you buy an investment grade bond with a predetermined interest rate and term (number of years) you will in nearly all cases receive your coupon (interest payment) along with the price paid for the bond if held to maturity. It’s rare, but exceptions can occur even with investment grade credit.
If you buy sub-investment grade bonds, you have a greater “reward” characteristic (higher interest payments) but also a higher chance the bond will default, leaving you high and dry.
Bond funds, however, do not behave in the same manner as individual bonds. The difference is most stark at the investment grade level. Say your bond fund bought a bunch of 10 year bonds paying 2.5% a year ago when 2.5% seemed like a good return. But now, investors can earn 4% on a similar 10 year bond. So in the open market folks begin selling those 2.5% bonds well before their maturity date. They sell for a loss just to get out of the position and to be able to reinvest their $$ in newer bonds paying a higher rate. So the bonds your bond fund holds fall in value. The fund’s lower NAV reflects the falling value of the bonds it holds. In addition, fund holders may “bail out” as the NAV starts falling, making it hard for the manager to buy those new higher yielding bonds for the fund.
What if you hang tight and don’t sell your bond fund? What will happen? Probably 1 of 2 things: (1) If interest rates fall over the ensuing years the bonds the fund owns should increase in value, They might even come to be worth considerably more than you (through your fund) paid for them initially. So, the fund’s NAV rises. However, (2) if interest rates continue rising, than your bond fund will continue to lose value and a lower NAV should result. Of course, as owner of said fund you should continue to receive interest payments, regardless of the value of the underlying securities. So even in a falling bond market (like now) there is a source of income to soften the hit.
@Anna - Your initial remarks are correct. Except, you seem to be assuming interest rates will continue rising (and bonds therefore “crash”). There is no absolute way to know that. Obviously, conventional wisdom at the moment does suggest your assumption is well grounded. Conventional wisdom is sometimes wrong. Just saying …
Well, I guess my actual assumption is that, at my age and for bond funds with a lot of Treasuries, I might not live to see rates return to previous lows and, since I don't need the income, the NAV is unlikely to increase and the value is most likely to go down. I guess I was just curious to ask if there was something completely erroneous in my thinking, And the answer, I guess, is - not as much as I might like. Thanks to you and @carew388 for your responses.
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John Rogers at Ariel Investments addressed this on Bloomberg today, calling the current markets “Crazy“ . Rogers added, “We’ve never seen this kind of volatility, up and down, the ups and downs intraday, it’s something we’ve just never, ever experienced,” he
https://finance.yahoo.com/news/markets-crazy-ariel-touts-old-163756433.html
And I agree that for we boomers or pre-boomers our investment options are pretty constrained.