You think I should invest money in bonds or bond funds now? The best bond funds could pay three times the interest income they can get on the bench. Even the safest bonds in the world, the U.S. Treasury bond, pay twice as much as a longer term CD at the bank. But before investing in bonds simply to increase interest income, read this.
When buying bonds that are paying money to the issuer as a company or the federal government. These are loans for you and promise to pay a fixed rate of interest and to repay the loan amount on a fixed date in the future.
What is not fixed is the price or value of your investment as you have. Bonds are traded on the open market lot for the people to do. Therefore, its price fluctuates.
For that reason, you may lose money, even in the safest bonds in the world, Treasuries. And you can take a loss, even in the best bond funds, because when you invest your money with them owns a small part of a bond portfolio of large size.
The bond market operates like any other market. Purchase of pressure sends prices higher, and the sale of the ships down.
The federal government borrows money by issuing government securities, like Treasury bonds. Billions of dollars of these bonds safer in the world are owned by foreign countries. Both China and Japan own a ton of U.S. government securities.
The U.S. national debt going through the roof and around the world, including foreign governments, is aware of this. What would happen if and when the world loses faith in the country's ability to maintain their financial commitments to this debt?
When doubt or fear looms, investors sell. If foreign investors start selling seriously Treasuries, bond prices fall. When falling bond prices this has the effect of interest rates increasing. Example: if a $ 1,000 bond, which has a fixed interest rate of 5% corresponds to a price of $ 500, buying for $ 500 get $ 50 (5% of $ 1000) a year of your interest .. . 10%. If, that is, the issuer does not default.
Even the best bond funds can not make money for investors when bond prices are falling and interest rates zoom up. If investors can invest money in a Treasury bond up to 10% a year, what kind of interest would be that demand for the bonds of others?
Fear is the greatest threat to any market, since it generates the sale. The point of this article is not to predict the pessimism for the future of America. The point is this: the bonds and bond funds pay higher interest because they involve risk. Interest rates are at historically low levels and the temptation for investors to load up on bonds is high.
History shows that interest rates fluctuate. In the early 1980s could make 15% interest and some experts predicted the rate only continue to climb. They were wrong, and if you think that charges at this time can only continue to decrease their time to think again.
The above scenario is my greatest financial nightmare for this country. If there is or not … in the not too distant future interest rates will rise and fall in prices of the bonds. If you own bonds when this happens, you lose money, even if it remains the safest of bonds in the world or one of the best bond funds.