Thoughts on when to shift investments

[A HERETIC I AM]

4. A couple things to keep in mind about bonds in the current environment.

Yields are near historic LOWS.

What that means is that bonds have been in high demand for their perceived safety for quite a while and as a result, their prices have been bid UP.

As prices rise, new issues are able to be offered at lower rates. In 2006, the coupon rate for a recently issued 30 year, US Treasury was 5%. Today it is 3.625. ( It got as high as 12% in the 80's! ) ( Source. ) It has rebounded from a low of 2.75 back in 2012

That means for every $1000 face value bond owned, the US Government will pay $36.25 in interest per year, split into two payments 6 months apart. When the bonds mature, you get your $1000 back.

If you were to buy a bond at current rates today and rates rise in the coming years, the value of your bond will FALL, meaning you will get less than you paid for it, should you wish to sell. You will still get the specified coupon rate regardless, it's just that the fall in prices makes your portfolio value shrink. This is the effect of changes in yield. Why would I pay you a grand for a bond that pays $36.50 when I might be able to buy one that pays $50 a year for the same amount? The price of your bond MUST fall because of the demands of the market.

I went into some detail on this subject in this post back on DU 2. It gives a bit more info on the mechanics as well as how a bond mutual fund works. I hope it may give you some more insight.