Bonds Looking Good Again

By: fedweek

If you’re looking for a chance to earn sizable profits with lower risk, consider the U.S. bond market. Long-term government bonds lost 9.0% last year, the second worst year on record (they lost 9.2% in 1967). Considering that long-term government bonds lost 7.8% in 1994 — third worst on record — and suffered a slight loss in 1996, this is definitely not a market that’s overpriced now. If you think that there’s scant risk in the bond market today, and virtually no risk of a 25% drop that might hit the stock market, where can you invest for a shot at high returns? Answer: Long-term bonds. The longer a bond’s maturity, the greater the chance for a big gain if interest rates go down. In 1995, when interest rates plunged, long-term government bonds (20-year maturities) returned nearly 32% while intermediate-term government bonds (5-year maturities) gained less than 17%!