 Good day, fellow investors. I recently received a question in the comments below what I think about bonds, especially high yield bonds. There isn't much difference between high yield and bonds or junk bonds, so I'll discuss in this video my view over bonds. That is, again, completely different than what the rest of the market sees. So if you own bonds, it will be good for you to see a different perspective. If you don't own bonds, it will be good for you to reinforce that notion of not owning bonds. So today I'll discuss the current bond environment, the long-term trends, what impacts bond prices and what has been the situation and what is the outlook for the future, the risks and rewards of owning bonds now, and I'll also discuss high yield bonds and ETFs. $100 10-year treasury bond portfolio since 1981 looks like this. If you would have invested $100 in 1981, you would now be around $1500, a bit more $1500. The returns were extremely positive and this is the 35-year bull bond market. Nevertheless, there have been also some negative periods for bonds. In 2013, the 10-year treasury bond lost 9.1%. This is with coupons. The above returns are also with coupons. 2009 lost 11%, 99 lost 8%, 1994 lost 8%. So even bonds, even the 10-year bonds that deemed the safest bond of all, can lose 8, 9, 10% per year. Now, why did those bonds fall in value with the coupon? Because interest rates went up. Here you have the same years that I mentioned before, 1994, 1999, 2009 and 2013. And you can see how interest rates went up. In 1994, from 5.77% to 7.8%, 1999 from 4.6 to 6.6%, 2009, 2.18 to 3.83%, 2013 from 1.87 to 2.99%. So each time interest rates increased by 1% to 2% or 100 to 200 basis points, the 10-year bond drops 10%. So it is logical that as soon as interest rates increase, bond values drop. And let me show you how does that affect bonds by what says the SEC. If market interest rates, this is an example from the Securities Exchange Commission, increased by 1%, then the value of a bond with 10-year maturity at the beginning with then 9 years remaining falls from 1,000 to 925. So this is just an increase from 3% to 4%. And the decline is 7.5% on the value of the bond. Now imagine what would happen if we see a reversal in what has been going on for the last 45 years, with declining inflation and declining interest rates. Let's see, is it possible that the trend turns around and we see increasing inflation and increasing interest rates for the next 45 years? Nobody thinks it's possible, because nobody looks beyond the past 2-3 years for information and for data, except a few people like Ray Dalio that I already mentioned. But who listens to Ray Dalio, that crazy hedge fund manager, right? Here, from the 1950s, the effective federal funds rate went only up. And I already mentioned in a video that by the end of the 1970s, bonds were called certificates of confiscation, because from the 1950s till 1981, all those that invested in bonds lost huge amounts of money. Nobody liked bonds. And then the story turned and interest rates went only down and inflation went only down. Where do you think can interest rates go from the current level, up or down, where I don't see them going more down? So bonds are carrying a huge risk. If in the next 30 years we see a repeat of what went on from 1950 to 1982, pension funds and all those invested in bonds will be terribly, terribly affected. Let me just show you a few calculations. Let's say you invest now in a 10-year treasury bond with an interest rate of 2.3%. And if that interest rate, that yield goes to 10% in one year, yes, you would have a higher yield, but you would lose 35% of your value because the required yield is much higher and the future value when you get your principal back is discounted at a higher rate. If I go to a 30-year bond and interest rates go from the current 2.86 on a 30-year bond to 10%, the loss on that bond in one year if that happens is around 65%. So we have the 30-year bond that yields 2.86%. The 10-year bond that yields 2. something percent. So that's the yield. However, the risk is 35% from the 10-year yield, 65% for the 30-year bond. For a return of 2% per year, isn't that a crazy, no reward, huge risk investments? That's my opinion on bonds. Now, if you want yields, don't look at bonds. Look at at least real estate because real estate increase in value with inflation and rents can be increased. Bonds are eaten up or destroyed if inflation comes. So think about that. Think about the safety and think about what can happen in the next decade, especially with longer-term bonds. Now, the next story is high yield. High yield is just a name coined by Wall Street in order to sell junk bonds. If you're selling somebody junk, he won't buy it. However, if you call it high yield, then oh, it's a very interesting high yield bond, much better than the low yield treasuries. However, high yield equals junk. Always remember that. Let's see the high yield market and how to go about it. This is the high yield US effective curve. You can see that the current yield on high yield, junk bonds, junk companies that have a junk credit rating is 5.55%, which is extremely low. However, you can see that as soon as there is some turmoil, that yield can soon jump to 22% like it did in 2008. And if that happens, you can expect immediately a 30-40% loss on the ETF, high yield ETF that you hold. But there is an even bigger risk. Now, there has been a proliferation of ETFs in the last 10 years. And all those ETFs invest in bonds, high yield bonds, also high yield ETFs. The point of owning an ETF is that you have quick liquidity. You can trade it every day. You can sell it as soon as possible. But in the last 10 years, yields have been going only down, so people didn't want to sell those ETFs. But if yields start increasing, if interest rates start increasing inflation, then people will rush to sell them. And when they rush to sell them, those ETFs will have to unload those high yield bonds. And there will be no market because nobody will want to buy those junk bonds. And let me show you a little bit more in detail. The iShares iBox high yield corporate bond ETF has issued 229 million shares. The value of one share is $88 something, thus the market cap of the ETF is 20 billion. The ETF I just mentioned owns 120 million of the SFFAR Group SA 2026 7.38 coupon bond. The total issue of the bond is 5 billion. So just this ETF, just this one owns 125 million of 5 billion. So that's 2.5% of the whole issue. And a few other ETFs that own the same and a few pension funds that want to hedge funds that want to unload this in case of panic. And you immediately see yourself with a 1 billion S and absolutely no bid. What will be the value of that? It will be cents on the dollar. Mark my words. Is that a risk worth running for a 5.5% yield? I don't think so. Therefore what you can do is really okay go for the 5.5% yield and then hedge it with a put option on the same ETF that you are buying. Because those put options are now cheap and the yield is higher. So you can really get a free lunch there. Try to calculate if you can find one. However be hedged if you are in long term high yield bonds. The conclusion is very easy today. Stay away from bonds. Whatever you do, stay away from bonds. The risk of loss is huge. The probability of loss in the next 10-20 years is huge. The returns are extremely low. This is a negative asymmetric risk reward situation. Something nobody wants to be in. This is because interest rates are low. Of course people compare investments. They don't look at common sense long-term risks. They compare investments. Compare this yield with what you get in the bank. Oh the bond gives me 0.5% more. Okay but then investing bonds only if you are happy with the yield and expect to hold till maturity. If you buy a higher yield bond in order to park your money for a few years, then don't do it. If you buy a bond, hold it till maturity, you know what you are doing, you are happy with the yield and you have several bonds with different maturity dates where you can buy new bonds at a higher yield later then it's okay. Then that's a different strategy. But be sure to know what you are doing. If you are just trying to park, make some yield on some bonds, longer-term bonds, don't do it. Italy last year I think they issued when the interest rates were very low, a 50-year bond at 3.2%. In the next 50 years, Italy will go bankrupt five times. So those who bought that yield were absolutely crazy as long-term investments. I'll finish with that. Enough about bonds. Those are really mass destruction items now. Perhaps in the next 10 years we'll come back on bonds, but for now on this channel we don't discuss bonds anymore. Thank you for watching. I'll see you in the next video.