Ian Fleming’s character, Bond…James Bond, also known as 007, was often depicted with a smoking gun in his hands as he enforced the will of the British Secret Intelligence Service in the international arena. Through the books and movies, we have come to learn that Bond was the agent who could get the job done no matter how messy the situation became and he could do it without showing any fear.
Unlike the movie namesake and accompanying actresses, bonds…long bonds, are not considered to be terribly attractive or sexy right now. In fact, some people may experience a sense of mystery and intrigue as to how and why these investments may fit into their portfolio at this time.
First off, what is a long bond? Investopedia defines a bond as "a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer." A long bond is a bond that matures or comes due a long time from now; typically thirty years from now. One of the main drivers behind the pricing of long bonds is the level of prevailing interest rates. As interest rates decline, bond prices increase. (You can trust me on this point or call me and I’d be happy to explain it in more detail) Within North America, interest rates have been falling since the late 1980’s which has pushed long bond prices to extraordinarily high prices.
How much lower can interest rates go? Not an awful lot further. The Bank of Canada’s governor, Stephen Poloz has reduced interest rates twice this year bringing the overnight rate to 0.50%. Rates are similarly low in the United State but they (the U.S.) are widely projected to begin raising interest rates later this year. Since bond prices work opposite to interest rates, long term bond prices in the U.S. have been dropping on the expectation that the interest rates will begin pushing higher. Based on this factor alone, one may not want to own a lot of longer term bonds for a long time.
In the short term, however, bonds can be heroes. When there is chaos in the world, the stock markets can experience higher levels of volatility. Investors typically react to economic or geopolitical shocks by pulling their money from the stock market and turning to government issued bonds because they represent safety. This can cause a jump in the price of long bonds which can be used to offset the declining stock market. In other words, if the stock markets do experience a Skyfall event, owning some long bonds may help to deliver a Quantum of Solace.
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