Question about Bond Market Type
Hey guys, I have a basic question about bonds I was hoping you could answer. I'm a beginner, so please take it easy on me.
To my understanding, a bear market for bonds (as with any other security) is when the prices fall. But this also means that yields (which I think is something desirable that investors seek) increase. So why is the term "bear market", which has a negative connotation, used to describe a high-yield investing environment (which is good)?
To ask the same question a different way... why is the type of market (i.e. bull or bear) determined by rising or falling PRICES, and not falling or rising YIELDS?
you're looking too far into this, since yields & prices move inversely, it's all the same thing. what people are saying is a secular bear market in bonds is because prices on existing issues will tend to creep downward in order to be equal to newly issued bonds at higher yields.
it's bad to own bonds during a rising rate environment because you lose if you sell the bond at a discount to your purchase price and you lose if you hold to maturity because you missed out on buying bonds a higher yields and possibly could be losing money on a real return basis (if we have a 1970s event where inflation is north of 10%).
capiche?
You really don't miss a beat brofessor.
I think it's even more basic, in that bullish and bearish are used to delineate direction, and there is just a persistent connotation that down = bad. You could easily say that rising bond prices are bearish for the stock market because of a 'flight' to quality due to whatever random crisis you want to talk about. Or say that rising rates are bullish for retiree's because they can now invest their money at higher yields.
Disassociate the terms from their connotations and I think you'll find it a bit easier to deal with.
Hey thanks for the timely response! I think I get what you're saying, but let me ask another one. People have been talking recently about the end to the "30-year bull market" in bonds, and how those were the golden days. How can this be if a bull market means prices are growing, which also means yields are super low? Aren't low yields bad for investors?
I'll stick by my other comment, that you are assigning a bunch of conceptual underpinnings to a comment about the direction bullish=up and bearish = down.
I think that low yields are bad for investors which rely on fixed incomes from dividends or savings and those that have to put cash to work and are simply looking for a decent return. That said, it also means theoretically that inflation is lower so your hurdle rate on cash is less than it would be in a higher growth/inflationary environment. Remember, bond yields theoretically are a combination of growth/inflation/risk premium etc, so those are reflected in yields across the curve.
think of a bear market as an environment where holders of that security lose money.
Bear market in equities is when equities go down, by your logic thats good because people can now buy stocks cheaper...
Addinator, I'm having a hard time dissociating connotations from the terms "bear" and "bull" because I keep seeing articles that say something along the lines of "the days of great returns" are at an end with the upcoming bear market...
But where did these "great returns" come from in the first place if bull markets = low yields??
Sorry if this is frustrating for you guys. Trying my best to reconcile all this information... Truly appreciate all your help
Bonds are complicated at first, but once you get past the initial Remember that when you buy a bond there are two main components of return, Yield and Price appreciation. Since they are inverse, when you have a bull market in bonds the majority of your return will be via price appreciation. I'm going to totally make up numbers below and ignore any duration considerations.
Let's say I have a bond at 5% yield and it is trading at 100 (par). Your bull market comes along which pushes the price up to 110 and yields down to 3%. Thus, you now have 10 in capital gains plus all of your coupons that you received while holding the bond. That's why you had such great returns because not only were people getting paid to hold their bonds via coupons they also were getting consistent capital appreciation via rising prices (falling yields).
If you invest in a dividend paying equity, the same thing happens. Higher prices of the stock = lower dividend yields. I can give you examples in equity terms if that helps at all.
forget the yield part and think of it like equity. from here on out, rates are only going to rise. all the bond you own and recently bought are going to fall in value. there is your bear market.
rates have decreased over the past 30 years. if you bought a bond then rates constantly fell so all the bonds you owed rose in value.
Do you have the same problem with this concerning equities? They follow a similar logic. Prices on equities fall to reflect changes in market and the future cash flows of a business. They should equilibriate to a point where it's fairly priced, and thus the expected return on the security reflects the output of the CAPM. If a security thus becomes overpriced (deviates from intrinsic price), the price falls. Thus, the expected return of the stock (invested post-correction) increases.
It's very simple. Ultimately, the only number that determines your profit or loss is the price. Everything else, incl the yields, is designed to explain the change in price in a way that makes intuitive sense. So prices are everything.
As to the end of the bull mkt in bonds etc, it remains to be seen whether such predictions are realized. Sure doesn't look like higher rates are a foregone conclusion at the moment.
i've had the same question, this post helped a lot, thanks to everyone who contributed
if i may add my own question: so if there's a bull market that means prices go up. great. you make money off of rising prices. easy as cake.
in a BEAR market, though, prices go down, but can't you cover your loss with the ensuing high yield? so basically, in the end, don't bear markets and bull markets lead to the same result? you earn big in one with rising prices, and you earn big in the other with rising yields
No because yield and price are two sides of the same coin. You buy a bond at yield x and the price goes down so market yield went up to z. You now hold a bond yielding x which is below the market yield z, reflecting your loss due to the price drop. Obviously investors do look at the nominal level of yields which have been at historical lows since ZIRP. This doesn't mean one should necessarily position oneself to short the market, which is greatly a matter of timing. One can complain yields aren't as high as they used to be but if everyone and their moms buy treasuries you still reap coupon income plus capital appreciation (including roll down).
What if, though, the market is going downhill today (bear market), and I decide that tomorrow (with the market still going down) that I will ENTER the market and buy a bond in the bear market? Wouldn't I get a low price, AND if everything works out and the bond doesn't default, I'll have gotten a good high yield out of it, too?
So in other words, a bear market can be good for you if you're newly entering the market?
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