Bonds bonds bonds

Someone explain how bonds are a good investment while interest rates are rising rapidly? Since, the value of the bonds you bought are going down with each rate hike and even if you hold them until maturity, unless you need the interest income now, you can wait around 6 months and get more yield for your money.

Maybe because you are taking a loan to buy bonds and use the income from the bond to pay the interest on the loan but how do you have a bond yield higher than the loan payments?

I don't understand so I figure people buying bonds just don't know or can't wait 6 months for higher yield. I think you can probably hold cash in a high interest savings account, withdraw an equal amount in cash as you would get from bond yield and buy the bond after a couple rate hikes and come out on top.

narfed said:

Someone explain how bonds are a good investment while interest rates are rising rapidly? Since, the value of the bonds you bought are going down with each rate hike and even if you hold them until maturity

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Bond funds have rather predictable returns over the long term. Yes the bonds decline in value with each rate hike, but the bond funds will still produce positive returns over longer time horizons. The bonds DO provide a guaranteed return to maturity. And bond funds effectively do hold the bonds to maturity, so they aren't going to lose money -- in the long term.

For example if you hold XSB, this fund holds mostly bonds that mostly mature in less than 5 years. By 2027, all the bonds in the portfolio will have matured and produced positive returns.

narfed said:

I think you can probably hold cash in a high interest savings account, withdraw an equal amount in cash as you would get from bond yield and buy the bond after a couple rate hikes and come out on top.

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It's very unlikely you can time the exact "top" in the rate hiking cycle. This kind of timing between cash & bonds is very tricky, so you may or may not perform better than passively holding bonds or GICs.

Many people are going to sit in cash, anticipating higher rates to come. At some point the rate hikes will be done, but people are not going to realize it. You can't know in advance when this will happen because it will depend on inflation readings, economic outlooks, and credit market health... a complex soup of conditions, plus subjective opinions of the central bank policy makers.

People who keep holding onto cash, even as rates start falling again, will underperform those who remained invested in bonds.

Or we might have some economic catastrophe much sooner than people think. For all we know, today's 3% to 3.5% yields in bonds could be as high as we're going. The central banks may reduce rates again. Someone who waited out the whole thing in cash will have forfeited the higher yields they could have collected.

And I'm happy to tell you that the past 10 years have been the worst 10-year return of the last 50 years. So hopefully it should get better?

We're currently having the worst return in every rolling period, with one exception for the 4-year roll, but I guess once June 2022 returns are out, it'll be the worst everywhere.

40 years of decreasing rates, are we at the inflexion point?