How Bonds give bigger returns (or losses) than you expect

 I posted on March 3rd, I am buying bonds!  I am 52 years old, and been an active trader (on and off) since 2006.  Until recently, I didn't see the upside value to bonds.

People hear that a 30 year bond yield is 2.4%, and say, that's a terrible deal to lock up all that cash for 30 years.

The trick is, you don't have to hold bonds for 30 years, you can sell them at any time, just like a stock.  This matters as the value of a bond can materially increase or decrease based on current interest rates.

Let me give you an example I bought $31,595  at a rate is ~2.4 % for a 30 year payoff. Terrible right? Such a terrible deal! Lets look closer!

So assuming I never sold, my total net paid back would be $64,632.23 in 30 years.

On 7/19/2021, the going rate for 30 year bonds was 1.81%  If you purchased $31,595 worth for 30 years, you would get $54,247.48 , that is a $10,384.75  difference!

So lets take a look at what happened to my bonds.

Above is the stands on my purchase, below is the current 'market value'

Up 18.5% from March 3rd to July 19th, a gain of 18% in 5 months, not bad!

So why did the value change?  Well since new bonds go at 1.81%, and what I purchased had a yield around 2.4%, My higher rate yields a premium to buy my bonds.  If I was to sell the bonds at $32,000, since I have held them only 5 months out of 30 years, you are getting a great deal! As going to buy from the government pays only 1.81% vs what I have at 2.4%

When you buy bonds the value of the bond today either yields a premium price or a discount based on current rates.

Lets say I sold this to you for $37,463.40, and you held it for 30 years at a rate 1.81%,  you would get $64,323.31.   That is Pretty darn close to what I would get after 30 years quoted above, $64,632.23 in 30 years.  its only off by 300 bucks!   The difference has to do with 'spreads' when buying bonds on the open market, you don't get the exact price that its worth.

So there ya go, I can sell these bonds, pocket 18% interest in 5 months and go buy stocks if I want.  Or I can hold for 30 year to go to 1%, which I think it may.  What will this be worth? It depends on when.  if rates hit 1% 29 years from now, the value won't change.  if its tomorrow, then the value will be up an additional $6,000, for a total of up $11K on a $31K investment, up 34%.

As you can see, when the stock market is topping, and we have a 'risk off' event, if you are in bonds early enough, you can get material gains when everyone else is down materially in investments.  At that point you can sell your bonds and buy stocks (or crypto) at a huge discount.

An alternate to buying bonds is buying TLT, and ETF that mirrors most of the valuations I showed here.
TLT is based on 20 year treasury, not 30 year, so the 'compound valuation' isn't as long as buying a direct 30 year bond.   I think TLT will hit a new high in the next year, at the same time the stock market will lose 10%-40% of value.  

In March the low was 134, its now at 150, and the high is 170.   From low to high will be a 26% gain.  From here a 13% gain.

Lastly, if your are a crazy gambler, TMF is a leveraged ETF based on bond yields.  In march it was $21.83, Monday it was up to $31, basically a 50% gain.  Since its leveraged, it will lose some value over time due to the multiplier costs.  So its a bit better for a trade of 1-3 months than years.

Good luck, I hope you now understand that Bonds are not as boring as you thought, there is risk of up or downside based on interest rates.