Why Bonds?

Everyday when you watch the financial news, the majority of the news is to do with stock markets; the Dow went up 2 %, the NASDAQ fell 4 %, Microsoft came out with a profit warning, Warren Buffet gave his money to the richest man in the world and so on and so forth. Bonds (gilts for you Anglicans) get a mention, but to the casual observer it makes no sense whatsoever, “The benchmark yield rallied 3/8ths to 101 and 3/16ths bringing yields down by 0.3% to 2.3%”. No normal sane individual can understand it. Sure enough, it kind of looks like English, it kind of reads like English and if you read it out loud it even kind of sounds like English, but it makes about as much sense as a speech by Don King.

The bond markets are the best kept secret in the investment world. Honestly, they are, take my word for it when I say it, after all, I’m a banker… You can trust me.

Everyone’s heard about bonds so how can I claim that they are a secret? Easily. I’ll tell you how to test this. The next time you are at a cocktail party try to kick off a conversation in this vain: “So how’s about those yields on Treasuries? 0.2 % in the short end, have you ever seen anything like it?” You will without doubt see the people in your little circle give you a blank look and start drifting over to the nachos and guacamole dip, leaving you to twiddle with the stem of your Martini glass all on your lonesome.

Although bond markets dwarf the equity markets in size, they remain a closed market for the private investors. Even private bankers (such as myself) who cater to wealthy private investors tend to be more equity driven, concentrating more on stock picking and hedge funds (well until recently of course). When it comes to bonds they will stick to bond funds and a few benchmark government bonds.

If you are a retail investors (definition: You don’t have a million bucks lying about the house) then your choice of bond investments in minimal. In fact, to put it bluntly, you are being taken to the cleaners. The most likely scenario is that you are being sold overpriced mutual funds with dismal track records. After a few years of dismal returns you give up in frustration and use what’s left to pay for the new tumble dryer your wife has been on about.

However, I am here to tell you that bonds are exciting, bonds can actually make you money (a novel idea in this market eh?) and once you enter the world of bond investments you’ll be one of the few who really are clued in to the market