Easily understand the relationship between interest rates and bonds and when to invest

Understanding the relationship between interest rates and bonds and how to time bond investments is explained in a way that is easy for beginners to understand.

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Hello, I'm a dreamy pig who always wants to share information and grow~!

The other day I came across an article like this.

https://news.heraldcorp.com/view.php?ud=20231212000651

Fed Monetary Policy in Transition..."The Era of Stocks and Bonds Returns" [Debriefing].

 

Here are the key takeaways from the article (I've summarized it so you don't have to read the long article!!)

• The end of the Fed's rate hikes has changed the investment landscape for the stock and bond markets.
• Opportunity to invest in long-term stocks and bonds.
• Bond investments are particularly attractive to retirees and those of retirement age who need a steady stream of income.

The bottom line is that as the Fed's monetary policy is expected to end its rate hikes and the tipping point is approaching, we need to be prepared to invest accordingly. So we need to invest in stocks and bonds, and I'm heavily weighted towards bonds, so let's start with what are these bonds?

 

   Today, I'm going to talk about the relationship between interest rates and bonds and the timing of bond investments. Bonds are one of the most popular investments along with stocks, but many people don't know much about them, so I hope this article will help you understand the basics of bonds and help you invest in bonds.

 

   First of all, what is a bond?    A bond is a debt instrument with a fixed maturity and interest rate. The person issuing the bond must paypaythe promised interest to the person who buys the bondand repay the principal at maturity. (Sort of like a savings account.) .

   Usually, passbooks are sold only by financial institutions such as banks and safe deposit boxes, but bonds are sold by various entities such as countries, general companies, and state-owned enterprises. There are many people who may say, "I've never bought a bond," but in fact, everyone who buys a car may have bought a bond issued by a local government without realizing it.

   At the end of the day, these bonds are companies or countries or some sort of entity borrowing money with the promise that they will pay a certain interest rate based on their creditworthiness.

   This creditworthiness is also expected to be awkward for many people. To put it simply, there is a perception that banks are safe, and the creditworthiness of banks is high. In banks, even if the bank fails, the Deposit Insurance Corporation guarantees the principal amount of 50 million won. This is why the general public has this perception that banks are unconditionally safe. Instead, it costs money to join the insurance company to eliminate this risk, and the interest is somewhat small. But what if there is a safe deposit without joining the Deposit Insurance Corporation?

 

There are. Typically, these are corporate bonds, government bonds, and municipal bonds that are rated AA or higher. It's much safer to have a debt instrument issued by a country that is safer than the Deposit Insurance Corporation, right? Let's get that out of the way and see how these bonds relate to interest rates.

 

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1. the relationship between the base rate and the bond

The key rate is the interest rate that the central bank sets against which market interest rates are based. When the rate goes up, market interest rates go up, and when the rate goes down, market interest rates go down.

The price of a bond is determined by the market interest rate. Higher market interest rates will lower the price of the bond, and lower market interest rates will increase the price of the bond.

 

(1) When the base rate rises, the price of the bond falls.

   When the benchmark interest rate rises, the market interest rate rises with it. As the market rate rises, the interest yield on the bond will decrease, and therefore the price of the bond will decrease.

 

(2) When the base rate goes down, the price of the bond goes up.

When the benchmark rate goes down, the market rate goes down with it. When the market rate goes down, the interest yield on a bond goes up, and therefore the price of the bond goes up.

 

2. Timing of Bond Investments

The timing of bond investments can be determined by the direction of interest rates.

 

(1) Rising interest rates

It is recommended to avoid investing in bonds, as the price of bonds declines during periods of rising interest rates.

 

(2) Declining interest rates

You may want to consider investing in bonds, as the price of bonds increases when interest rates are falling.

 

(3) Uncertainty about changes in the base rate

   In a period of uncertainty about interest rate changes, bond investments should be made with caution.

3. Tips for Investing in Bonds

   To be successful in bond investing, you should keep the following in mind.

 

(1) Understand the types and characteristics of bonds.

There are many different types of bonds, including government bonds, corporate bonds, and currency stabilization bonds. Each bond has different characteristics, so it's important to understand the types and characteristics of bonds before investing.

 

(2) Consider your investment objectives and risk appetite.

 Although bond investments are categorized as safe assets, you may incur losses if you fail to hold the bond until maturity. Therefore, you should consider your investment objectives and risk appetite before investing.

 

(3) You need to diversify your investments.

Diversifying your investments across a range of securities, even in bonds, helps reduce risk, rather than investing in a single security.

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   Today we discussed the relationship between interest rates and bonds and the timing of bond investments. To summarize...

1) A bond is a certificate of deposit-like instrument in which a company, country, or organization borrows money from a bond buyer based on its creditworthiness.

2) When the base rate increases, the yield on the bond decreases, and when the base rate decreases, the yield on the bond increases.

3) This is why it is generally beneficial to invest in bonds when interest rates are falling.

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  First of all, as I showed you in the article, there is now an expectation that the US interest rate will peak and then peak out and transition. Of course, the expectation may be wrong, but many institutions and analysts are expecting it with various reasons, and in fact, there is a mood that it will be lowered at any time, although there is a difference in the time frame. That's why we keep hearing this unfamiliar bond talk.

 

  Bonds are one of the representative investment assets along with stocks, but many people don't know much about bonds, so I hope this article will help you understand the basics of bonds and help you invest in bonds.

   Although bonds are classified as a safe asset, they are an investment product that can result in loss of investment amount. Therefore, please read the prospectus thoroughly and understand the investment before investing.