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According to the Securities Industry and Financial Markets Association (SIFMA), in September 2016, an average of $722.6 billion in bonds traded every single day in the United States alone.
Nationally and globally, the bond market absolutely towers over the stock market – by nearly 35% worldwide, and more than double in the United States.
Tens of millions of investors – especially retirement savers – own bonds, and conventional wisdom tells them to park between 50% and 60% of their wealth in those bonds.
But… according to a survey by Wells Fargo and Gallup, a measly 22% of investors really understand how bonds work.
That's shocking, and I aim to do something about it. That way everyone will be able to participate in the bond-market profit play I'll show you…
The Most Important Thing to Understand About Bonds
It just so happens that bonds' most critical feature is one of their simplest, too: They move inversely to interest rates.
It's that simple. If interest rates go up, bond values go down, and vice versa.
Now, here's why.
If interest rates go up, then an existing bond becomes less valuable to investors because a new, equivalent bond – in other words, of the same same quality and maturity – will pay more.
If instead interest rates go down, as they mainly have been since peaking in September 1981, then existing bonds become more valuable. That's because they were issued paying higher interest rates than new bonds offer.
If you want to buy one of those bonds today, you have to pay a premium to receive the higher rate.
OK, so now you understand how bonds work. But that's only looking in the rear-view mirror.
Here's where I think we're heading…
What We Can Expect from the Bond Markets Now
In September I told you that, thanks to failed central bank policies of zero and negative interest rates, as well as massive QE programs, governments are about to grab the inflation baton and run with it.
Large infrastructure projects and spending are rapidly becoming the preferred method of kick-starting the inflation leaders are desperate for.
And now markets, especially the bond market, are beginning to sense this and price it in.
Remember, inflation means things will cost more, including the price to borrow money. Translation: interest rates are starting to rise, and the 35-year secular trend of declining interest rates looks increasingly like it's coming to an end.
Even though the Fed's been holding short-term rates historically "lower for longer," long-term rates can rise if the market expects inflation. By discounting those bonds, the market's essentially saying: rates need to be higher.
And now another, very specific, short-term lending market is saying the very same thing.
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About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.
Tags: Bonds