The Redfish 411 August 2021

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In this edition of the Redfish 411, we're talking about Bonds and what I'm expect to see in the news.

The markets just closed for the day closed down about 55 points but we are still the S&P 500’s in record territory as you know on the 411 what I try to do is bring about a particular topic just to let you know what I'm thinking about when it comes to the markets and kind of what I think is going on out there give a little background give a little flavor if you will to the markets as well as try to use this for education and so I did want to talk to you guys today about bonds and what I'm seeing in the bond market and what I think you should expect to see in the news now bonds ordinarily it's more fun to talk about stocks but one of the basic things that I tend to spend a lot of time teaching is how the bond market works what makes the bond market work

I think if you can get a grasp on what makes the bond market work you can then better have an idea of what is making all of the overall markets tick So what I want to do is just spend a few minutes talking about bond basics that will lead me into the conversation which is what is in the news today and what has some people fearful about the stock market which is called the big bond taper or bond tapering and we're going to get into that so real quick I'm going to give you a little 101 if you will on the bond markets so how a bond works a bond is simply a piece of paper many of you have had bonds before you've had CDs before you've heard of treasury bonds it's just a piece of paper that represents an amount of money so from my examples and for most bonds the amount of money that one bond represents is $1000 so one bond is $1000

The way that it works is you give $1000 to the government the company to whomever they give you a piece of paper which is their word or their bond between you that says I'm going to hold onto your $1000 for X amount of time the maturity let's just pretend five years I'm going to hold it for five years and for me to hold your money for five years I'll pay you 5% interest a year on that $1000 for five years and at the end of five years I'm going to give you your $1000 back you're going to give me back my piece of paper and we both walk away happy so all different companies utilize bonds or the local government utilizes bonds you have these you hear about bond issues all the time that is how people raise money is they issue a bond with a simple interest rate on it for a specified amount of time you can have one week bonds you can have a 30 year bond you could have a 50 year bond I've seen some court so the but the point being there's all different time frames and all bonds act similarly like if I could say the word similar but a little bit different.

So what are some of the differences the first thing is difference in a bond that I think you've got to pay attention to is who is behind the bond that's known as the issuer who is the issuer of the bond. I'm going to make up a scenario for you the scenario that I'm going to use is let's use a big local company let's use Exxon Mobil and let's use Bob's pencil shop this is the one that I used to use and all my little seminars that I used to give but I would choose somebody in the audience say you're going to open up a company what do you want to do we would make up a company on the spot yeah it made it more fun I think it made it more fun so left pretend that you've got $10,000 and you want to buy a bond and Exxon says OK I will give you my bond I will pay you 3% interest for ten years and then I will give you your $10,000 back so that's how that Exxon bond would work so it's a 10 year bond $1000 per bond you're buying ten of them $10,000 it's backed by Exxon after 10 years excellent gives you back their bond their piece of paper their word their agreement and in the meantime you collected 3% interest OK not bad that was the deal but then on the other side of the equation you've got Bob's pencil shop and there's a guy named Bob and he just thinks that pencils are going to be the next the next wave that people are going to have to have at their business desk and so but he needs startup capital and so you're sitting down and you've got the Exxon bond paying you 3% and Bob says will find I tell you what I write you a bond you give me $10,000 I'll give you 3% for ten years too OK so we have an Exxon bond and we have Bob's pencil shop bond both paying me 3% which one do you trust to get your money back and make all of those 3% payments do you trust Exxon more than you trust bobs pencil shop or do you trust bobs pencil shop more than you trust Exxon well this is obviously you trust Exxon more so X if Exxon is paying you 3% you go back to Bob and say look dude you're a brand new car excellent been around forever I don't think they're going anyplace you're going to have to pay me more than 3% he says fine I'll pay you for you say no thank you five no thanks until you come to where the market thinks it can go so Bob might have to pay you 20% so now you're going OK I can give a bond to Exxon Robert again 3% or I can give it to Bob's pencil shop or I can get 20% per year or $2000 a year so you literally more than double your money but that's what it takes so the higher the risk usually the greater the yield needs to be so in essence that's how that works.

Now let's talk about interest rates what has to do with these bonds let's go back to our Exxon bond and you've got 10 years to maturity and they're paying you 3% or what happens if interest rates in the United States of America start to go up if interest rates go up you can buy a similar bond to the Exxon bond that's paying silver sent they might be have the same credit worthiness as Exxon so let's just pretend it's world that shell just to make this conversation easy so you've got a Royal Dutch Shell bond at an Exxon bond both with the same maturity but one is paying you 4% the others paying you three which bond do you think is worth more obviously that 4% so as interest rates go up it actually damages the value of the Exxon bond so if interest rates are going ah bonds are not the place to have your money because their value even though you're going to get your money back if they stay in business you get your money back at $1000 per bond but throughout that 10 years the price that bond is going to vary wildly let's say hey I need to sell this bond I need that I need m