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
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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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