How Bond Investing Can Still (Sometimes) Fail | WSJ — Transcript

Full transcript

1. 0:00- [Jordan] These are government bonds.
2. 0:01(transition thudding)
3. 0:02Even if you know nothing about them, you might have heard.
4. 0:05- Treasuries have proven always to be a reliable,
5. 0:08safe haven investment.
6. 0:09- Recession fears have caused investors
7. 0:11to flee to safe investments like Treasury Bonds.
8. 0:13- U.S. Treasury Bonds are a pretty safe investment.
9. 0:17- Nothing can touch them
10. 0:18- [Jordan] But there's a caveat.
11. 0:20Not all bonds are the same.
12. 0:22Some let you take a bit of a gamble by selling them.
13. 0:26And if you do, like Silicon Valley Bank had to,
14. 0:29you introduce the one thing
15. 0:31that everyone says bonds don't have, risk.
16. 0:36We break down how the fail safe investment can fail.
17. 0:40And why despite that, bonds are still so safe.
18. 0:44(gentle music)
19. 0:47(upbeat music)
20. 0:48Bonds are IOUs.
21. 0:50- The government gets a lot of money from taxes
22. 0:52but it spends more money.
23. 0:54So it has to borrow money.
24. 0:57- [Jordan] And that's where bonds
25. 0:58aka Treasury securities come in.
26. 1:01You give the government money
27. 1:03and it promises to give it back at a later date
28. 1:05with some interest.
29. 1:07And the government takes this promise very seriously.
30. 1:11This makes bonds an ideal investment if safety,
31. 1:14rather than a large return, is an investor's top priority.
32. 1:18Bonds tend to be a popular investment tool for retirees,
33. 1:22investors looking to add some cushion to their portfolio,
34. 1:25or parents looking to start their kids' college fund.
35. 1:29And the bond market, as we know it today,
36. 1:31can be traced all the way back to the First World War.
37. 1:34(tape whirring)
38. 1:35- [Narrator] From a pistol shot at Sarajevo,
39. 1:38the first the great modern world wars explode.
40. 1:41- [Jordan] In 1917,
41. 1:42the U.S. government released Liberty Loans,
42. 1:45a type of bond meant to garner public support
43. 1:48and funds for the war.
44. 1:50People could cash them in typically 10 to 30 years later.
45. 1:54Ultimately, Liberty Bonds raised more than $17 billion.
46. 1:59That's 2/3 of the funds America raised
47. 2:01for the First World War.
48. 2:03It marked the birth of the modern Treasury market
49. 2:06and introduced investing to many Americans.
50. 2:09♪ We've got another bond to buy. ♪
51. 2:13- The government issued more war bonds during World War II.
52. 2:16After the war, they were converted to savings bonds.
53. 2:19- [Narrator] It's your future.
54. 2:21Build for it, save for it.
55. 2:23Buy shares in it.
56. 2:24- [Jordan] We still have savings bonds today.
57. 2:27Like war bonds,
58. 2:28they can only be bought directly from the government,
59. 2:31and you can't sell them.
60. 2:32Though, you can transfer them to people as gifts.
61. 2:36- (indistinct) gift, Merry Christmas.
62. 2:39- Thank you.
63. 2:39- [Jordan] The only thing that could prevent you
64. 2:41from getting your money when your savings bonds mature
65. 2:44is if the Treasury defaulted.
66. 2:47Okay, it wouldn't look like that,
67. 2:49but the government defaulting on its debts
68. 2:51would be catastrophic.
69. 2:53However, it's incredibly unlikely to happen.
70. 2:56- The fact that everybody thinks
71. 2:58that treasuries are safe helps make them safe.
72. 3:01Investors around the world just pile into treasuries.
73. 3:04That makes it very, very easy
74. 3:06for the U.S. government to raise more money
75. 3:09in the bond market.
76. 3:11- [Jordan] This perpetuates a cycle.
77. 3:13People buy bonds from the government.
78. 3:15The government spends the money.
79. 3:17It issues new bonds.
80. 3:19And then it uses some of the new bond money
81. 3:21to pay everyone back.
82. 3:23Plus.
83. 3:24- The US government can always raise taxes
84. 3:26or cut spending in order to pay back its bond holders.
85. 3:30- [Jordan] So the way to introduce risk to bonds
86. 3:32really comes from, well, you.
87. 3:36Not all bonds function like savings bonds.
88. 3:39Take these securities, Treasury Bills, Notes, and Bonds
89. 3:44you can buy in the primary market,
90. 3:46meaning you get them new in a government auction.
91. 3:49Or the secondary market,
92. 3:51meaning you buy them from another seller.
93. 3:54And unlike savings bonds, you can sell these bonds
94. 3:56to someone else in the secondary market before they mature.
95. 4:00But if you do, you introduce risk.
96. 4:03So why take a perfectly safe investment
97. 4:06and make it less safe?
98. 4:08- The benefit of the secondary market
99. 4:09is that if you need the money, you can always sell the bond.
100. 4:13And you don't have to wait 10 years until the bond matures.
101. 4:17- [Jordan] But if you sell a bond,
102. 4:19you're not guaranteed to get the face value you paid for it.
103. 4:22That's because a bond's value in this market
104. 4:25is always changing.
105. 4:27In that way,
106. 4:28the bond market looks a bit like the stock market.
107. 4:31To understand how this risk works in the real world,
108. 4:34let's look at Silicon Valley Bank
109. 4:36- Silicon Valley Bank was getting a lot of money in
110. 4:39from the tech sector,
111. 4:41and it needed a place to put that money.
112. 4:44- [Jordan] So it bought billions of dollars
113. 4:46of medium to longer term notes and bonds
114. 4:48for the same reason anyone buys them,
115. 4:51they're a safe place to park money for a while.
116. 4:54However, at the time the bank bought these bonds,
117. 4:57the interest rate on the bonds was low.
118. 4:59If the bank had been able to hold its bonds to maturity,
119. 5:03then the interest rate wouldn't have mattered.
120. 5:05The bank would've cashed in their billions, plus interest,
121. 5:08and that would've been that.
122. 5:10Instead, a few things went wrong.
123. 5:13to ease rising inflation,
124. 5:15the Treasury increased interest rates.
125. 5:17And when interest rates rise, bond prices fall.
126. 5:21This left a roughly 17 billion gap
127. 5:23between what the bank paid for the bonds
128. 5:26and what their value was,
129. 5:27putting the bank in a bad position.
130. 5:30To get more cash and buy newer bonds,
131. 5:32Silicon Valley Bank had to sell some of their bonds
132. 5:35at a loss in the secondary market.
133. 5:37This helped trigger a run on the bank
134. 5:40and led to its collapse.
135. 5:42Now, this is an extreme example
136. 5:44of what can go wrong in the bond market.
137. 5:47- What happened to Silicon Valley Bank is not the norm.
138. 5:49Most people aren't forced to sell
139. 5:52billions of dollars of bonds at a big loss.
140. 5:56If you have to sell them early,
141. 5:58you probably won't see a big loss.
142. 6:00And you could even see a gain
143. 6:02if interest rates are falling.
144. 6:04- Ultimately, there are still no safer investments
145. 6:07than government bonds.
146. 6:08- Stock prices can go down like 4% in a day.
147. 6:11On a day-to-day basis,
148. 6:13you don't have that risk if you're buying and selling bonds
149. 6:16that you do have in the stock market.
150. 6:18- [Jordan] That's why they say.
151. 6:19- Nothing can touch them.
152. 6:21- [Jordan] Well, almost nothing.