Bonds Are Not Forever: The Crisis Facing Fixed Income Investors

For over thirty years, since interest rates peaked in the 1980s, two powerful economic forces have been at work. The steady fall in interest rates and inflation helped bring about a dramatic growth in debt, by both governments and individuals. This culminated in the real estate led boom and bust in 2007-08, following which government debt levels exploded as they sought to offset the sharp fall in economic activity. The other big story during this time has been the growth in financial services, as banks, brokers and Wall Street, pushed on by decreasing regulation, came to represent a bigger share of employment and the economy. Both of these trends, debt and a financial sector that are both bigger than we need, are changing the paradigm for savers. The consequences are likely to be unfriendly to bond investors through disappointing future returns as well as greater populist-driven acceptance of inflation as a cheap way to devalue money owed by the majority to the minority. Although bonds have been a great investment for many, future returns are highly likely to be negative after taxes and inflation. The author shows why, by linking the growth in financial markets and debt and drawing comparisons with other times in history. Consequently, the case for selecting certain sectors of the equity market for the long term is compelling. By working in Finance for more than 30 years the author draws on many anecdotes to provide a grass roots view that complements the high level perspective being described.

Readers of this book will:

• Gain a different perspective about the debt build up that led to the 2007-08 crash, that links falling interest rates with a growing financial sector that helped increase debt levels at many levels of society
• Follow the personal experience of one observer to this history through illustrative and sometimes amusing anecdotes
• Consider the combination of budget pressure and growing political populism that is moving against Wall Street and is more friendly to borrowers than lenders
• Learn how to invest their savings to avoid the worst risks facing the fixed income market

Keywords: General Finance & Investments