Three Fundamental Misconceptions about Bonds (or more broadly “Fixed Income”)

1)????Bond Market is Smaller than Stock Market

Although bonds usually attract less attention than equity markets, the broader fixed-income markets are more than three times the size of global equity markets!

Bonds serve a host of purpose that a regular investor does not necessarily fully appreciate. Bond (Debt) financing is an important source of funds for households, governments financial institutions, and non-financial entities. Well-functioning fixed-income markets help ensure that capital is allocated efficiently to its highest and best use globally

2)????Negative Yields (that was being talked about until around 2020/21) Does Not Mean Negative Cash Flows, Or that Investor is guaranteed to lose money

If I had a nickel every time, I hear people talk about this, and how this makes bonds a terrible investment

Cash Flows on a bond = “Coupon Rate” that is locked in at time of issuance. This is different from the Yield that you hear in the media

Think of Yield (more specifically “Yield to Maturity”) as the current price of the Bond. Just as stock price

Yield is expressed in %, so when it turned negative, more applicable for the government bonds (that admittedly was an anomaly), people thought that investors are now guaranteed to lose money. This is not necessarily true. I could write an entire article on this topic alone (let me know in the comments below)

3)????Higher (Positive) Yield does not necessarily make Bonds an attractive Investment

Because of Inflation and Taxes (if applicable)

Additionally, Interest on Bonds tend to get taxed at a much higher tax rate (vs. Dividend or capital gains income).

Remember its not a coincidence when the Inflation was low (around 2% or below), bond yields were also low. Now, there are other factors at play that impact the bond yields, but Inflation is undoubtedly one of the key factors.

So why invest in BONDS? They look like terrible investment atleast in some ways, in addition to being confusing and/or difficult to understand!? Very relevant these days, as folks are trying to get a handle on root causes for the spectacular SVB failure

Primary purpose of the Bonds (Fixed Income) asset class:

-??Diversification: ?that has generally speaking shown to lower the overall volatility of the traditional investment portfolio (that is some combination of stock & bonds)

-??Income especially in Retirement (Cash flows): ask a baby boomer that is enjoying their retirement based on “guaranteed” pension (more specifically “Defined Benefit” pension plan)

Bonds over the last 10 years are now being complemented by Private Real Assets (think Real Estate, Private Credit)

We have barely scratched the surface here, Fixed Income in general play multiple other critical roles in the broader financial markets and economy that gives the appearance of them being a terrible asset class that is not accurate

The likes of Dalios, PIMCOs, Oaktrees of the world are not that naive to stick with Bonds over multiple decades now and have very successfully created generational wealth for investors and offcourse themselves!