Understanding bonds, bond prices and bond yields

Virtually everyone has heard of stocks and bonds. While most people have a good understanding of stocks and how they work, the same cannot be said for bonds.

While bonds aren’t nearly as glamorous as stocks, they are no less important. In fact, bonds are arguably MORE important than stocks.

For example, the global bond market is larger than the global stock market. According to the International Capital Markets Association, the global bond market was valued at $128 trillion as of August 2020* whereas the global stock market was at the time only about $90 trillion, according to data from Apollo reported by CNBC. 

In my opinion, bonds aren’t nearly as understood or talked about as stocks is because they don’t trade on an exchange and the financial media doesn’t glamorize them as much as stocks.

When you watch the likes of CNBC, you see talking heads broadcasting live from the floor of a stock exchange with lots of huge flatscreens in the background flashing intraday stock price changes. 

Bonds don’t trade on exchanges and therefore don’t have a centralized place for financial media personalities to set up a desk from which to broadcast. Bonds trade “over the counter,” which means they trade direct between buyers and sellers over phones, e-mail, proprietary trading platforms and other forms of electronic communication. For these reasons, there isn’t nearly as much information on trading histories or prices for bonds as there is for stocks. Therefore, people don’t hear as much about bonds as they do stocks. 

Unlike stock prices, bond prices are mathematically range-bound and typically won’t have wild unexplained swings. Hence, the financial media focus their attention on stocks more than bonds because stocks make for juicier stories.

Okay, I’ll stop ranting now. My point is that bonds are an integral part of retirees’ investment portfolios and are no less important than stocks. However, many people don’t fully understand or appreciate bonds. Or at least, they may not understand or appreciate bonds nearly as much as they do stocks.

To help bridge that divide, I recently did a live video in my Facebook group, Taxes in Retirement, about bonds and how they work. It’s a tad technical at times, but I hope you find it helpful.

*it’s difficult to find reliable aggregate data on the global bond market. August 2020 was the most recent data I could find that were from a reputable and trusted source