Even Bonds At Risk In Bear Market

Mar. 01, 2020 10:40 PM ETBND, GDP, SJNK13 Comments
Malvin Spooner profile picture
Malvin Spooner


  • Not all bond ETF's are created equal.
  • Widening credit spreads will cause some bond funds grief.
  • Huge duration risk at these low interest rates for some bonds.

Yield curve inversions foretell recessions and more recently the bond market is telling us it's pretty much we're here already - we won't be able to measure a recession for months however (economic data is always delayed and revised repeatedly). I'll conclude that holding two bond ETFs makes sense - one very short term and the other a long term bond ETF. For segregated accounts, the same barbell approach would work.

losing money pic

For bondholders a recession is ordinarily a good thing - generally the value (yes bonds trade in the market and have prices) of bonds on average rises in a recession as interest rates fall. Rates decline for a variety of reasons, but most notably the central banks orchestrate this to encourage borrowing to stimulate a troubled economy. But (and this is a huge but) not all bonds are created equal. Some are high quality (issued by governments) and at the other extreme there are bonds we call 'junk'. In the middle there are corporate issuers, some good & others not so much (these are rated according to their credit risk for the benefit of investors). To complicate matters further, how bonds behave when interest rates change depends on their term (3 year, 5 year, 10 year or 30 years). The bottom line is you can lose money in bonds even during a recession, and whether you do or don't depends on multiple factors.

Understanding a bit about the math behind bonds is useful. This is especially true in times of distress. For example, corporate bonds are more risky than government bonds, and therefore pay higher yields. Yet over time, depending upon market conditions the spread (difference between risk-free government bonds and corporates) varies. Take a gander at the historical spreads from this chart:

As you can see, the spread between

ChartData by YCharts

ChartData by YCharts

This article was written by

Malvin Spooner profile picture
Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored An Investment Maverick's Guidebook which blends his experience touring across the heartland of the United States on his Harley with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources predicted the prior boom in natural resources - published early in 2004. He now teaches Finance, Economics, Business Strategy & Professional Ethics course at a Canadian college.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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