Sunday, July 6, 2014

Bond math - we are in for more risk

It is always good to go back to basics when discussing return and risk of different asset classes. Unfortunately, getting inot the details may not always be pleasant. Let's look at bonds. Volatility has been low, but if we get some greater moves in rates, bond investors may be in for a significant surprise. The duration of bonds for any given maturity have increased. The reason is simple. Coupons have declined. With more of the cash flows centered at the maturity date, there is a longer duration.  Consequently there is less income cushion when we look at the total return. 

For all of those that think that bonds will be a safe assets, think again. The low coupons will not protect investors. 

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