Chapter 7. Special Bond Market Investment Opportunities

In the previous chapter, we discussed investment-grade bonds, which represent most of the U.S. bond market. You also learned a technique to identify when interest rates trends are favorable for holding investment-grade bonds, and when they are unfavorable. The biggest problem with investment-grade bonds as of mid-2007 is that the interest rates they are paying are relatively low by the standards of the past 25 years. There are two negative implications of historically low interest rates:

  1. Even the most carefully selected portfolio of investment-grade bonds is unlikely to return more than 6%/year over the long term, because that is the level of current interest rates.

  2. Because interest rates have ...

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