Confucius bonds to invest in 2016 famously said: ‘Life is really simple, but we insist on making it complicated. Nowhere is this truer than in the bond market.
The essential elements of a bond are straightforward: the buyer of the bond lends money to a company or government for a fixed period of time, and – providing that institution doesn’t go bust – they are paid interest and receive their capital back at the end. But there are a lot of variables. For example, it is possible to change the length of that loan. If the term changes from, say, five years to 20 years, there is far more time for the company to go bust, for interest rates to change and for inflation to rise. And how much interest should bond holders receive? Are they paid enough to make it worth their while moving out of cash? Will their payments rise with inflation?