Man Overboard!

Anticipation surrounds my early morning coffee along the starboard railing. This morning, while standing there in the cool humid darkness, I await the arrival of dawn's enlightened hints and with my eyes closed allow the chilly bow splash to spray against my face.

The weight of the ship can be felt striking the oncoming waves, the bow rising in rebellion only to return for another melee.

In this moment I realize .... I am starting to listen for her.

The glint off the water of early morning's arrival reflects back to me my sailor's intention, time for training......

Interest rates have been falling for 30 years but have not been this low for 80 years. As they start to rise from extremely low levels, there will be many ramifications.

Today we focus on just one, and it is a big one, their affect on Bonds and Bond prices.

Warning – reading about the definition of a bond is like swallowing salt water, it can taste really bad but sometimes it can not be helped.

What is a bond?

Simply put, when a government or corporation wants to borrow money from you, it will promise to pay a certain amount of interest every year (lets say) and pay back the original amount at an agreed date. If you agree, you have in affect purchased a bond. (please forgive the oversimplification)

As a sailor, why do I care?

The first thing we need to know as sailors trying to determine into which waters to navigate our ship, is:

“When interest rates rise, the value / price of bonds fall.”

That is a huge deal. We have just come off of 30 years of “falling” interest rates (rising bond prices).

Now that has all changed. We are now looking at rising interest rates (and falling bond prices).

This means that;

“Potentially, this is the worst time in 80 years to own long term bonds”.

What? What does that mean? Bonds are not safe? What is a long term bond?

Bonds have more than just interest rate risk but you will have to excuse me……….

Someone from our group has just through themselves over the railing and I have to go sound the alarm......

"MAN OVERBOARD!".