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Invest in Bonds That Don't Drain Your Travel Funds

Feb 22, 2019 | 10m

Gain Actionable Insights Into:

  • Why you can’t ignore the bond market and should follow smart money economics
  • The different types of bonds, what they entail and what you need to know before investing
  • Understanding credit securities, yield to maturity and all things associated with bonds
  • The key risks, terms and economic indicators to look out for to make better investment decisions


The World of Bonds

Most people don't realise how big the bond market is. Everyone is following what’s happening with stocks like the Apple share price, but Apple has over 300 bonds. Each of these bonds is slightly different and worth a few hundred million. You shouldn’t ignore the bond market because its market value is much larger than the stock market. The U.S. Publicly Traded Stocks is about $27 Trillion while the U.S. Bond is about $40 Trillion. The Global Publicly Traded Stocks is $70.1 Trillion while Global Bonds is $92.2 Trillion.

So how do stocks and bonds differ? If you own shares of stocks in a company, you are an “owner” but if you own a bond of a company, you are a “loaner”. When you buy a bond, you're loaning a sum of money to its issuer for a specific period of time. In exchange, the issuer promises to make regular interest payments at a predetermined rate until the bond period ends. They then repay your principal amount upon maturity. For example, you might buy a 10-year, $10,000 bond paying 3% interest. The issuer, in exchange, will promise to pay you the interest on that $10,000 every six months, and then return your $10,000 after ten years.

It is often said that the bond market is smarter than the stock market and there’s a lot of truth to this. The bond market provides useful insight into the future state of the economy through the shape of the yield curve (a conglomeration of bond yields at various maturities). An inverted yield curve, which means that short-term rates are higher than long-term rates, has correctly predicted the last seven recessions dated back to the late 1960s. The last two times the yield curve inverted was in the years 2000 and 2006, before each of the last recessions. While the stock market is also somewhat of an economic indicator, it is more of an emotional and volatile market. The mid-cycle sell-offs in the stock market, which are common, are easily confused as signals of an impending recession.

Bonds have developed so intricately from a personal level loan to a mass level loan. In the past, companies that wanted to start growing had to find partners who would lend them money. This was at a time when there was no real trust or governance around lending money, so there was no form of guarantee. As such, for companies to get money and grow, they had to offer equity to partners. When the law came along, and records were better kept, loans started getting issued officially. When the government began taxing people, wars were started because taxes were too high. This then caused the creation of a system where the government loaned a certain amount from citizens and then returned it with interest. Such a concept extended across to farms, big industries, and filtered down to small corporates. Bonds became preferred over equity because companies preferred to give less ownership to others. As a result, the bond market expanded quickly. What started as a simple loan between two people has become large scale loans between conglomerates and hordes of people.

Due to this natural development of bonds, they don’t just come in one form. They come in multiple shapes and forms, and I’ll lay this out for you in the next chapter.

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