Our weekly newsletter is out, and this time we’re taking a look at the old standby of safety plays: bonds. You see, in the simplest terms, people tend to be motivated by two competing passions: greed and paranoia. When times are good, economists say that our interest-maximizing caveman brains urge us to try and get our hands on as large a slice of the resource pie as possible. However, when fortunes turn and times get tough, paranoia sets in as we try to protect every last scrap of what we’ve gained. It is this eternal psychological battle between gains and losses, risks and rewards, that shapes the markets we trade.
It’s also why so much is made of talking about risk compared to return, and it’s here that there has always been a demand for safe havens – places where people feel confident in the return OF their capital. And when it comes to safety in the last 30+ years, bonds have definitely been tough to beat. The long decline in rates (and corresponding increase in bond prices) has cemented the appearance of safety and stability. The current bond bull market has been underway for so long, it’s easy to forget that it hasn’t always been this way.
While we’re usually preoccupied with the Treasury bond bubble, our friends over at Welton Investment Corp. recently released an excellent paper as part of their Visual Insight series (click here to view the full piece) focusing on the corporate bond bubble. Like us, they’ve been wondering what the future holds for this “safe” refuge. In reality, that veneer of security is like the surface of a still pond… filled with piranhas. You see, bonds have historically had what Sean Kelly of The Samples called, “a dark side.” Just like the song, everything can be perfect and happy, right up until disaster strikes and a more somber note takes effect. Hand-wringing over our economic future is definitely not new, but in light of Welton’s work now seems like the perfect time to look beneath the placid surface to see what those murky depths contain.
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