Three myths about the bond market
The era of declining interest rates may have come to an end, and many investors don’t seem to realise it
FOR the last 40 years, interest rates have gone pretty much one way: down.
In the last 18 months, however, rates have crept up, and many are worried they will stay high. In other words: Reality is catching up with the bond market – and with the myths that have grown up around it. Here are three of those myths.
Safe bonds are also risk-free bonds
The “risk-free asset” appears in asset-pricing models, and is considered the barometer of risk for the entire market. But what exactly “risk-free” means is not so obvious. It’s not the case that anything which has a low probability of default – US Treasury bonds, for example – is risk-free. When yields were low, investing in a 10-, 30-, or even 50-year bond seemed like a free lunch, a bit of extra yield at low risk.
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