Why it is not a good idea to invest in bonds during early upswing, even when the bond yield are rising ?
If bond yields are rising (as you correctly pointed), it means their prices are going down - i think that answers your question, although this is relatively common knowledge (i dont want to diminish you or your question by any means! it is just that i think there is something else that i dont follow on your question probably)
Thanks for a prompt reply, although I meant that if bond yields are rising, that would also mean that they offer a higher return? And since economy in general is doing good there are few chances of default by those high yield bonds so wouldn’t that be a good time to invest in these high yield bonds?
The intuition here is not to look at yield in isolation, rather, look at it in the context of the wider interest rate movement in the market. As the previous commenter has pointed out, if yields are rising, prices are falling, so if you are long treasuries or bonds, you will face immediate capital loss. Furthermore, yield is just a theoretical return as it is premised on you holding till maturity AND whenever you receive those measly coupons (I’m assuming coupon rate < yield), you are able to reinvest/lend them at that average yield rate.
On the other hand, profiting from price appreciation is immediate if you bought a bond below par, and if now rates are falling, once you have successfully sold the bond above par, that is realised profit- even sweeter if you manage to get a coupon during the holding period.
The problem here is that this is all theory. Just like when they say an inverting yield curve = doom. Well we had an inverted yield curve a few months ago, only for SPX to hit all time highs a few weeks later. And eventually when you hit a recession, some nerd with a text book will say “well I told you so”. Economists have predicted 9 of the last 5 recessions.
If yields are rising, you could go long on those bonds. The problem is that there could be further increases in yields after you initiate a long position because ‘it’s the early upswing’. But if the early upswing ends up being a bull trap, then you’ll have locked in a terrific long term yield.
What I’m trying to say is that you’re not off base thinking along these lines, OP. But to pass the exam we’ll have to answer in a certain way.
Thank you so much, I understand it now. 