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You May not Want to Read this Article About Bonds

Please consider not reading this article about bonds and call me instead. The complexity of bonds makes them easier for me to discuss over the phone than to write about succinctly.

Nevertheless, with the help of links to some very good articles on the subject, I'm presenting a short overview of how bonds work and how they have been performing recently.

Bond Basics -- Bonds constitute a loan from a lender to a borrower. When you buy a bond, you step into the role of the lender and look to receive payment back over the term of the loan. If only that was all there was to it. This Investopedia article presents an excellent overview of bond basics.

The Role of Bonds in a Portfolio -- As this PIMCO article explains, bonds offer a number of advantages in an investment portfolio: income generation, capital preservation, capital appreciation, and a hedge against an economic slowdown.

Bonds are Struggling at the Moment -- While bonds can provide a useful role in a portfolio, there are times when they lose value, such as now. Since 2020, the Federal Reserve has implemented various measures to counter the economic impact of the Covid pandemic. Presently, the Fed is seeking to unwind these efforts in order to combat inflation. Supply chain problems and soaring commodity prices, exacerbated by the Ukraine war, have made inflation even more of a threat. You can learn more in this Morningstar article.

Bonds May be Signaling a Recession -- Now we're getting into the weeds. The bond yield curve has partially inverted, which may suggest a pending recession as this Morningstar article explains. Economists joke, though, that the yield curve has predicted 10 of the last 5 recessions.

Even so, bonds' current slump is not necessarily indicative of the future. We've seen how circumstances can change fairly quickly. Bonds still have a role to play in a well-balanced portfolio, especially during troubling times. If the economy does slow down and inflation subsides, the Fed may pause its tightening, thereby restoring bonds' role as a ballast to your portfolio.

We can, of course, talk about all of this at your convenience. I promise there will not be a quiz.

Words of Wisdom

Things could be worse. I could be one of my creditors. -- Henny Youngman