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What is not cool is when you invest in a conservative sounding open-end bond mutual fund that holds mostly corporate bonds, and it experiences a “run on the fund” and blows up and takes a large part of your principal down with it

Posted by Richard640 @ 19:31 on February 12, 2019  

Bond Funds Are “Potential Source of Financial Instability,” after Years of Global QE and Low Interest Rates: Fitch

“Liquidity issues at bond mutual funds could result in wider contagion and affect other parts of the financial system and the macro economy.”

Bond investors go for different risks and returns. There is buy-low-sell-high, unless things don’t work out and it’s buy-high-sell-low. Buy-and-holders buy bonds when issued and hold till maturity, collecting coupon payments and then getting their money back – unless things don’t work out.

Other investors buy a bond when a company or an entire sector gets in trouble, such as the shale-oil space in 2015 and 2016. They might buy a distressed junk bond for 40 cents on the dollar, at a yield of 20%, that then does not blow up, allowing them to collect coupon payment representing a 20% yield from cost, year-after-year until maturity, when the bond is redeemed at face value for a capital gain of 150% (cost 40 cents on the dollar, redeemed at 100 cents). Sweet deals, if it works out.

There are many ways of taking calculated risks with bonds. And that is cool.

What is not cool is when you invest in a conservative sounding open-end bond mutual fund that holds mostly corporate bonds, and it experiences a “run on the fund” and blows up and takes a large part of your principal down with it — making it far riskier than the actual bonds it holds. This happened to a number of open-end bond mutual funds during the Financial Crisis, including Schwab’s family of “YieldPlus” funds.

Bond Funds Are “Potential Source of Financial Instability,” after Years of Global QE and Low Interest Rates: Fitch

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Post by the Golden Rule. Oasis not responsible for content/accuracy of posts. DYODD.