Bonds have a reputation for being conservative, even boring. But no one ever accused them of being easy to understand. I get a steady stream of emails and blog comments about bonds, and they reveal that many investors are very confused by how bond ETFs work, how they’re affected by changes in interest rates, whether investors can use alternatives to bonds, and even whether it’s OK to abandon them altogether. So my next podcast (which goes live on April 19) is devoted to answering common questions about bonds, with the hope of clearing up some of this confusion. As a companion to the podcast, I’ve also created a short series of blog posts addressing the same questions.
In this first installment, let’s dig into one of the most fundamental concepts for bond investors to understand: the inverse relationship between bond prices and interest rates: when one goes up, the other goes down. This is confusing for many people—after all, investors regularly complain that bond yields are low, so shouldn’t higher interest rates be a good thing? And why are we told to stay away from bonds because yields might rise? You never hear people say you should avoid stocks because their dividends might get higher.