Quote:
Originally Posted by bizaro86
You improve your returns on reinvested interest and on reinvesting bonds that come due. Assuming you kept maturities reasonable (say by laddering 5 years) this would really help you.
Yes, your existing bonds will decline in value, but assuming decent credit quality they'll still pay you the contracted amount, so you haven't "lost" anything unless you need to sell them.
Edited to add: I wrote this: http://seekingalpha.com/article/2214...interest-rates on how to prepare for higher interest rates. It's not a rate forecast (it was in response to a reader question on how to prepare for higher interest rates). It's a bit US focused (ie, in Canada it would be lock in for 5 years not lock in for 30) but the general principles are the same. Canadian rates will rise eventually, but low oil prices probably put that back a bit |
Yes, thats true and I get how individual bonds operate. Its true that a lot of the return is reinvestment income, but the fact is most people don't buy individual bonds. A lot of people (retail investors) are buying bond funds, and those bond funds don't operate that way. They are trading these bonds, and the other area that they have been juicing returns with is High Yield or better known as junk bonds. That is another issue, but they're about to get smacked with such a large percentage of that space being smaller energy firms.
The other point is that a lot of people who are retired and invested in bonds are forced to sell to some extent because they have minimums they withdraw both to live and due to legislated mandates. I just don't see a lot of individuals who buy single bond positions and hold them to maturity. It does happen, but not very often in what I've seen.