What I'm going to say here is simple, yet utterly essential to bond investing. Bond yields are cyclical. These cycles are different from than stock investing cycles, and easier to identify. Technical analysts in particular love to chart stock movements over various period of time, and from those movements, to deduce grand trends. They give them fancy terms, like "Elliott Wave". They'll argue that a sharp upward movement in stock prices is really a head-fake in a larger "secular" bear market. Some will see deeper meaning in the hourly fluctuations of a specific stock; thus unleashing a storm of day trades.
Bond cycles are much simpler. Bond yields go up for a relatively long time, and then they go down. I have a spreadsheet (mentioned before) which begins with bond yields over a very long time (from 1946 to the present). The key yield for my purposes is the Moody's seasoned Baa yield. This is a benchmark bond yield for a "typical" corporate bond of mid-level investment quality and long-term duration. It's not a blue-blood bond, but it's a good way from junk. These bonds have some investment risk, particularly over time, but that risk is quite small. Diversification in the bonds you buy will largely take care of this risk.
In 1946, the first post-war year and the year of my birth, the Moody's seasoned Baa yield was 3.4%. Not great, considering that inflation that year ran at 14%. Still, the BAA yield stayed in that general range for the next ten years. It then moved into the 4% range, then 5% by 1966. By 1968, the rate had jumped to 8.5%, and finally topped out at 16.1% in 1982. Rates then began a long, slow decline: back to 8% by 1996, and 6.5% by 2007. There was then a tsunami between 2008 and early 2009, which almost disappears in the official statistics for those years (7.44% and 7.29%). In fact, in late 2008 and early 2009, corporate yields of all kind skyrocketed! Many issues topped 20%. Since then, however, the long-term cycle has reasserted itself, with the seasoned yield somewhere under 6% right now.
Notice, over nearly 65 years, a grand swoop up, and a grand swoop down. Lots of business in between, but that's the bottom line. So, being astute cycle experts, what's next? Will the grand down-trend continue back to those 3% levels of the 1940's? Damned if I know. While hindsight is 20/20, the future is almost always murky.
Still, there are a couple of really important things you can learn from this long cycle. 3% is a fairly rotten long-term bond yield, and 16.1% is a really high one. So, it's simple, right? Don't buy bonds with a 3% yield, and load up when they're 16%. Yeah, true enough. But when those bonds were yielding 16%, inflation was running over 20%. Guess what? People deserted bonds in droves in 1982! They were terrified of hyperinflation (Zimbabwe style), and feared bonds like the plague. You couldn't give the darn things away. Back in the fifties, lots of folks were pleased as punch to lock in a 3.5% yield: they were being responsible and avoiding risk.
Clearly, those few brave souls who dove in in 1982 were rewarded extravagantly. The long bonds they bought went up and up and up in price. They were geniuses. So, what happened to the idiots who bought in 1950? Well, THAT DEPENDS. If they made a lump sum investment, and did nothing afterwards, they got slaughtered. Even if they held bonds to maturity, inflation devastated their results. If, however, they kept investing, and particularly, if they reinvested their income as it came in, well, amazingly enough, they did very well too! Why? Because a regular investment program let them buy some high yield bonds too. Almost every scenario I have run confirms the same thing; stay in the bond market long enough to catch the full up and down, and you'll prosper.
Of course, in the long run, we're all dead, and few folks have a sixty-five year investment horizon. Can good things come with a shorter time line? Possibly. I'll have more to say about that in awhile.
