On this fine Monday morning, it looks like we’re going to witness another big opening for gold and silver. I’m thrilled we were right about the metals bull market and that it’s paid off handsomely so far, saying nothing of what may happen over the next year.

But let’s turn our attention, albeit briefly, to an asset class I currently loathe: bonds.

Thanks to the current and coming inflation, I wouldn’t touch bonds with a barge pole. However, I realize some would, even if it’s just for the perceived safety and diversification they offer. Still others are “chasing yield.” That means they’re using bonds to increase returns. (“Yield” and “return” are synonymous terms, though the former is more commonly used in the bond markets and the latter in stock markets.)

But what if I were forced to invest in bonds? What bonds would I buy? What would I avoid?

Let’s answer those questions by getting a few facts about bonds straight. But first, I read a couple of articles in The Journal this morning that effectively summarized the state of the U.S. economy.

The WSJ Articles

The first article discussed how the credit market is humming despite signs of the economy slowing and an increase in bankruptcies. This is the proverbial “picking up pennies in front of a steamroller” that I’m sure will get investors carried out before too long. Though rates are falling now, I don’t think this is a secular (long-term) move. It’s what a cranky president, a weak central bank, and a stalling economy will get you. However, compared to the rest of the world, the U.S. is the prime economy. 

The second article discussed how Microsoft has lower borrowing costs than the US government. This isn’t the first time a corporation has had lower borrowing rates than the USG. In its prime iPod/iPhone/iPad years, Apple did, as well. If memory serves me correctly, Apple’s corporate treasury used to have more cash than the U.S. Treasury.

What are these articles implying?

The first is intimating the market is becoming jittery about corporate bond holdings, although they are substantial, and demand remains strong. The second is wondering about the wisdom of demanding lower yields on companies that don’t have a convenient printing press like the U.S. government does.

Let’s do a quick review of bond basics to clarify these points.

Government Versus Corporate Bonds

When most people think of bonds, they think “that’s the safe part of the 60/40 portfolio.” They imagine U.S. Treasuries, backed by the full faith and credit of Uncle Sam. But that’s just one corner of the bond universe. Governments borrow by issuing bonds to fund deficits, wars, and pork-barrel projects. On the other hand, corporates borrow to expand their businesses, finance takeovers, or sometimes just keep the lights on.

Government bonds are generally considered the lowest-risk paper in their respective currencies. 

Corporate bonds, however, carry the added risk of company performance. All corporates should be considered higher risk than govies, all else being equal. Of course, Apple issuing a bond isn’t the same thing as a regional mall operator doing it. It’s the same type of bond, but with a radically different risk profile.

Investment Grade Versus High Yield

Here’s where the ratings agencies step in. “Investment grade” refers to a borrower being deemed reasonably safe, with a low likelihood of default. Think of it as the superstars of the bond market—boring but dependable. Their ratings range from AAA to BBB- for S&P (Aaa1 to Baa3 in Moody’s ratings).

“High yield” (also known as “junk bonds”) are the market’s z-list celebrities. Their ratings range from BB+ and below (Ba1 and below for Moody’s). Junk pays a higher coupon because you’re lending to shakier borrowers.

Some investors love junk because the yields look juicy. Just remember, you don’t get something for nothing in markets. That higher coupon is there for a reason: the extra risk you’re assuming when you buy it.

The Risks of Owning Bonds

Bonds aren’t a free lunch, as Robert Heinlein might say. They carry their own basket of risks, and if you don’t understand them, you’ll get bitten. Stocks can go to zero, but bonds can quietly bleed you with lower prices, illiquidity, or outright default. Let’s break it down.

Default Risk

This is the obvious one. If the borrower doesn’t pay you back—either interest or principal—you’re left holding wallpaper. Governments usually avoid default by printing money or rolling over debt, but corporations can and do go bankrupt. This is what we mean when we call U.S. Treasury bonds “risk-free.” 

Corporate bonds don’t have a magic printing press. Enron and Lehman are case studies in how bondholders can get wiped out when things go south.

Interest Rate Risk

Bond prices move inversely to interest rates. When rates rise, your existing bond with its fixed coupon looks less attractive compared to new bonds paying higher yields. That means your bond’s market price falls.

This is what crushed bond investors in 2022 and 2023: the Fed’s rate hikes slammed the prices of bonds that had been considered “safe.” Safe in credit risk? Sure. Safe in market value? Not a chance…. Not even for “risk-free” US Treasury bonds.

Yield Curve Risk

The yield curve, a chart of bond yields across time, is the bond market’s crystal ball. Typically, longer-dated bonds yield higher returns than shorter-dated ones. However, when the curve inverts—meaning short-term bonds yield more than long-term bonds—it signals fear, a recession, or outright policy mistakes. Investors who stretch out maturities, thinking they’ll “lock in” rates, can find themselves upside down if the curve shifts unexpectedly.

Yield curve risk is where pros live and die.

Chasing Yield

This is the oldest trap in fixed income. Investors see a corporate bond offering 8% while Treasuries pay 4% and think, “I can earn twice as much.” Sure, you can. However, that assumes the bond doesn’t default. 

That extra yield is the market’s way of showing you the additional risk you’re taking on. Chasing yield without understanding the underlying risks is a fool’s errand. Sure, you’ll get a few shiny coins—until you’re potless.

Wrap Up

You can make a few dollars in bonds while rates are falling. But why take these obvious risks when gold and silver are performing so well and are likely to continue doing so?

I’ll stick with my miners portfolio, thanks. But if you’re willing to take the risk in front of the steamroller, bonds might be for you.

Have a great week ahead!