quote:

Originally posted by Rey HRH:

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Originally posted by Fly-Sig:

A better economy means stocks should go up, and new bonds will have lower returns. Existing bonds become more valuable. So the smart trade is to sell your existing bonds and put that money into stocks.

I agree with everything else you said except for this part. Generally, the relationship between stocks and bonds is inverse. When stocks go up, bonds go down. This is because the market expects a better return with stocks so they sell their bonds; doing this lowers bond prices and raises stock prices. Lowering bond prices mean their yields increase (lower investment cost for the same dividend amount). This makes the stock and bond markets reach a new equilibrium - stock expectations for higher returns pull money from bonds lowering bond values and increasing bond yields until the investors say the higher yield I’m getting with my bonds is not worth giving up for the additional risk of moving into stocks for its higher potential reward.

I'm not sure I buy that, but I'm thinking about it. Bonds can be a bit mind melting.

Let's assume yesterday I owned a $1,000 bond that has a 5% interest rate, pays no interest along the way but pays the full face value at maturity, which is 2 years from today. The nominal value today is $907. If you want my bond, you'll have to pay me $907 (or you could deposit your $907 in a bank account paying you 5%). In 2 years the bond pays the owner the face value of $1000. The $907 investment earned 5% per year for 2 years.

Now let's assume today that new 2 year bonds are only paying 4% interest. If you were to buy a new $1,000 bond at 4% you'd pay $925 for it, and at maturity you'd have $1000. But you could buy my 5% bond and get a better interest rate. I want $925 for it now, not the $907 I wanted yesterday, because I know $925 is what everybody is paying today to buy a new 2 year bond at 4%.

My existing bond just went up in value because the interest rates for new bonds went down. There will be less overall demand for bonds, so I won't get the full $925, but I'll get darned close to it or I'll hang onto it and keep earning 5%.

To look at it another way, if you only pay me $907 for my bond, I can't get back to $1000 in 2 years by buying a new 4% bond today with that $907.

In any case, for me I only buy T-Bills and I always hold them to maturity. I am in it for the safe and known returns, not the price speculation. That's where I park my next 3-5 years spending cash, to guard against a bear stock market.

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Originally posted by Fly-Sig:

quote:

Originally posted by Rey HRH:

I agree with everything else you said except for this part. Generally, the relationship between stocks and bonds is inverse. When stocks go up, bonds go down. This is because the market expects a better return with stocks so they sell their bonds; doing this lowers bond prices and raises stock prices. Lowering bond prices mean their yields increase (lower investment cost for the same dividend amount). This makes the stock and bond markets reach a new equilibrium - stock expectations for higher returns pull money from bonds lowering bond values and increasing bond yields until the investors say the higher yield I’m getting with my bonds is not worth giving up for the additional risk of moving into stocks for its higher potential reward.

I'm not sure I buy that, but I'm thinking about it. Bonds can be a bit mind melting.

Here's a link to investopedia article:

How Does a Bull Market in Stocks Affect Bonds?

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Key Takeaways
In theory, rising stock prices draw investors away from bonds, causing bond prices to drop, as sellers lower prices to appeal to potential buyers.

Since bond prices and bond yields move inversely, eventually, the falling bond prices would push the bond yields high enough to attract investors.

In a bull market, equity prices move higher, boosting investor confidence, and making investors less risk-averse.

In this environment, low-risk bonds are less appealing than riskier stocks, and stocks surge more in response.

However, there are other factors that also impact the direction of stocks and bonds, including interest rates, monetary policy, inflation, and investor sentiment.

One stupid exercise the professor had us do was to stretch out our arms to the side and make like a see saw. "When stock prices go up, bond prices go down. When stock prices go down, bond prices go up."

In your example, that's what's called a coupon bond and the prevailing bonds pay quarterly dividends. You're correct that if yesterday you bought a $1,000 bond for $907 giving 5% interest rate (I assume your math is correct) and today, interest rates go down to 4%, the value of your bonds will increase to $925 to make today's value reflect today's interest rate of 4%. You will get the full price because to the buyer, it makes no difference, he's going to get 4%. And for you, if you turn around to buy a bond, it will also be at that price. minus transaction fees, of course.

I have a few pounds of silver in olds coins. It strikes me that, in a SHTF situation, silver coins of smaller value would be easier to barter with.

Trying to move a 1 oz gold coin/bar might get more difficult. I kinda like the 1/10 and 1/4 fractional. GSR is collapsing with gold rounding off but silver continuing to climb. Au and Ag may be renamed unaffordium and unobtanium respectively.