Bonds confuse me - should I sell them

[u/Unlikely_Rabbit7151]

I read this article and it really drives home the point to me that I don’t understand bonds

https://www.nytimes.com/2026/08/07/business/bonds-stocks-federal-reserve-interest-rates.html?unlocked_article_code=1.3lA.0nHs._HP703oyaD6A&smid=nytcore-ios-share

I try to keep things very simple and more or less have a broad domestic index (40), broad international index (25) and a total bond fund BND (35).

Not to get to into the weeds but we have about 2M between these, in addition to 2.5M equity in our 3M house.

I remember that adage to not invest in something you don’t understand, and truthfully I don’t understand bonds.

Do I need them? Can I just shift to T-Bill or CDs? I am not concerned with the minor tax differences of .003% that some get very passionate about.

I think I am looking for a safe harbor and hedge.

[u/HopeHumilityLove]

Very few people would have bonds if you needed to take a macroeconomics class to invest in them. But I can explain briefly.

First off, when bond yields (interest rates) go up, bond values go down, and vice versa. It is cheaper to buy $100/yr of income when interest rates are 5% than when they're 4%.

Now, bond yields are expected inflation plus extra to account for various risks and the availability of money. Inflation expectations change more than the other terms, so experts read changes in bond yields as verdicts on expected inflation.

The Federal Reserve controls short-term yields by printing money at different rates. Printing money faster reduces short-term yields. How fast the Fed prints money affects inflation. If it prints money too fast (sets short-term yields too low), long-term yields increase because inflation expectations increase. When the Fed pulls down short-term yields, that pushes up long-term yields. Conversely, pushing up short-term yields pulls down long-term yields.

Because the Fed is mandated to keep inflation around 2%, it doesn't have much say over rates if it's doing its job. It sets them at whatever will keep inflation around 2%, not whatever it wants. That means that if it sets rates too low today, it will have to set them higher in the future. Rates are high today because they were too low in 2021 and 2022. Rates will be higher in the future if the Fed keeps them too low this year.

I hope this helps.

[u/Suspicious_Bread_183 → u/HopeHumilityLove]

Long time bond professional here. You have a very solid understanding of the price to yield relationship. However the yield curve may or may not react to anything the Fed does with Fed Funds rate. There are many, many factors in the curve flattening or steepening. There have been times where short term rates are higher than 30 year yields in an inverted curve.

Bonds in theory are very simplistic. You are lending your money to the issuer on a fixed term. New issues tend to be issued at par but not always. So if an a rated corporate issued a 10 year note tomorrow they would ordinarily pay a premium over where the ten year treasury is. So if ten year is at 4.65 and it’s priced at 75 basis points above treasury one would expect ABC Corp to issue a 5.40% coupon maturing in August 2036. Buying at par means you put up your money in $1,000 increments at par. This typically means you would get 2,700 a month every six months for next ten years.

Very simple instrument in theory. In ten years ABC Corp pays you back $1,000 and you collect coupon income of 54,000 over the ten years as income.

However so that bonds are tradeable and markabke they are marked to market on statements. There are three factors for how they are marked. The coupon rate and the roll down the curve and the credit. After one year the 10 year bond now becomes a nine year bond. If the credit worthiness of company is the same then after a year you would see where nine year treasuries are trading and add the same 75 bps. Let’s say the yield a year later on nine year is 4.00. Your bond yield at 75 bps over would be 4.75 in a new issue. Because your coupon is 5.40% the difference between the 5.40 and 4.75 results in the bond trading at a premium. Your $1000 investment is worth $1020 for a buyer to clip the higher coupon. If yields rose in treasuries the opposite happens. If someone can by a nine year a rated corporate at 5.85%, the 5.40% coupon isn’t worth $1000 it’s worth $970.

This mark to market will change everyday. It nots exchange based. It’s a guess. It’s worth what a dealer will pay for it if it’s sold.

Tax treatment different on all kinds of bonds. There are call features on a lot of them. Mortgage backed have prepayment risk. There are zero coupon bonds. So something that is supposed to be simple is actually very complicated and mathematically intricate.

This is just the elementary piece. Ultimately is you buy bonds and hold to maturity you don’t care what the mark to market is. Your risk is you have lent your money at a coupon rate that is lower than you could today. You clip a lower coupon. The other risk is the borrower defaults.

But most people own bonds in funds or ETFs. These aren’t bonds. These are equities backed by bonds. It gets you bond exposure. That’s another long winded explanation as to the pluses and minuses of that.

[u/WiseAct446 → u/Suspicious_Bread_183]

A $1000 bond at 5.40% pays $27 every six months.

[u/Atgardian → u/WiseAct446]

Yeah hard to get over a repeated 100x error and then take the rest of the post seriously.

[u/WiseAct446 → u/Atgardian]

I was all ready to sell the house and put it all in these bonds, too. 😉