Investors poured money into bonds and bond funds in late 2008 and all of last year in search of safety and higher returns. Now the bond advantage is shrinking as risks are rising.
In the late 1990s, it was tech stocks. In the mid-2000s, it was real estate. And today bonds are the investment people can't get enough of, unlikely as that might seem. Lured by bonds' perceived safety -- not to mention some spectacular deals, the kind unseen in decades, with 15% yields -- investors plowed $313 billion more into bond funds than they took out in the first 10 months of 2009.
Risk-free? Not really
Brokers, of course, get a commission on each bond they sell -- usually between 1% and 1.5%, often much higher than for a stock trade. And that adds up quickly: Based on 2009 data, fund companies stand to earn at least $2.6 billion more than they did in 2008 from sales of bond funds, whether bonds make or lose money.
Bonds, of course, are not the most straightforward of investments. Trying to explain how bond prices work -- they usually go down when interest rates go up, and vice versa - this inverse relationship - can exhaust even patient financial planners.
The math on bonds comes down to this; ask yourself one simple question: Will interest rates eventually rise from their current historical lows?
Consider: a one percentage point increase in 5-10 year rates can equate to a 10% drop in the value of your bonds.
Prices on even "safe" government bonds could fall 30% or more if interest rates soared over the next few years. Some corporate bonds could fall even more. Be ware.
For further see: MoneyCentral and WSJ.
Saverio Manzo
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