Ups and downs
– Jeff Meissner
Many people believe that stocks and bonds go in opposite directions. They think that when stocks go down, bonds do well and go up. While that does occur some of the time, it’s not an absolute. Take 2008 for instance, both stocks and bonds went down and lost money at the same time.
The link between bonds and interest rates is much more reliable. We often use a teeter totter to explain the relationship between the two. As the interest rate end of the teeter totter goes down, bond values go up. When rates start to rise, the bond end of the teeter totter starts to fall.
The reason for this link is because every bond has a set rate of interest that it pays. If a bond has a 4% rate and interest rates drop to 2%, that bond continues to pay 4% and the value of the bond increases because everyone would love to own a investment that is paying 4% when rates are at 2%. In that example, rates went down and bond values went up. Just like the teeter totter.