Word: moneyitis
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John Kampfner is the author of Freedom for Sale: How We Made Money and Lost Our Liberty
...risk in financial markets has an irritating habit of following investors around. The big rush into bonds - especially high-quality, low-risk bonds such as Treasuries and government-guaranteed mortgage securities - may have created a situation in which most of today's bond investors are bound to lose money. Not 50% losses, as in the stock market, but losses nonetheless. Which for many newcomers to bonds will be a big shock...
...They lost money on their house, they lost money on stocks," says Tom Atteberry, co-manager of the FPA New Income mutual fund. "They put money in bonds because they think it's safe. Then interest rates are going to rise on them, and they're going to lose money on bonds...
Before we get into the details, it's worth going over the difference between stocks and bonds. When you buy stock, you get part ownership of a company. If it does well, you share in the gains. If it flounders, you lose money. Bonds, on the other hand, represent a promise from a company or government or other borrower to pay you back, with interest. When you buy a bond, you're making a loan. Sometimes bond issuers (a.k.a. borrowers) renege on their promises. The financial crisis originated with a rash of defaults on subprime mortgages that had been packaged...
Most bondholders, though, will find it hard to avoid losses. And what will retail investors do once bonds have burned them too? Atteberry thinks many will just put their money in the bank. The trade-off there is a measly return: the highest savings-account rate in the land is currently just 1.83%, according to Bankrate.com and most banks pay far less. Less than inflation. But hey, at least the money's safe...