Ever since the stock market crash, investors have moved on to putting their money in bonds as the price never changes while the interest they receive is just as good.
However, just recently, experts are of the opinion that the prices could fall at last. So, here are 5 reasons why you should be careful when you invest in bonds:
#1: Rise in Prices
Not only has the demand risen for every kind of bond in recent times but their prices as well. People are buying even risky bonds from companies with a reputation for shaky finances as well as cities and states that are dealing with massive public-pension bills.
#2: Big Investors
A number of owners in bond sectors include small Main Street investors. Unfortunately, they are far more scared off than insurers and pension funds who tend to stabilize the market despite a number of booms and busts that the market has seen.
#3: Trading has dropped
Compared to values in 2006, both corporate and municipal bonds only trades from a third to a half less since then. Once a few big sales take place, the prices will definitely fall.
#4: Banks not involved
Banks have abandoned the role of the middle man which matched sellers and buyers and keeping the corporate and municipal bond market liquid. They’ve also stopped buying and selling bonds themselves.
#5: Hike in Rates
The Federal Reserve is expected to hike interest rates and which will give test the market as soon as that happens. The last time this happened in 1994, not only did bond prices drop but a major hedge fund collapsed with companies like Proctor & Gamble and Orange County in California having to file for bankruptcy.