Debunking the Myth
A lot changes over a 10- or 20-year period, which can easily be the length of a bond’s full term. Sitting on a bond until it reaches maturity amid a constantly changing interest rate and economic landscape – and in the face of the unpredictable fortunes that can befall businesses – is generally not the approach of professional money managers. Individual investors might also want to think about whether it is the right approach for them.
Think of some of the most recent high-profile bankruptcies of recent years; holders of bonds issued by GE, Lehman Brothers, Kodak, and Sears (among others) very likely thought they owned bonds whose repayment was without doubt. In this new age of technological disruption, arguably corporate permanence has never been more precarious.
John Maynard Keynes, the great economist, when criticized that he had changed his mind on a particular issue, responded famously “When the facts change, I change my mind. What do you do, sir?”
Well, the facts are always changing in the fixed income world. Conditions revolving around bond pricing, interest rates, inflation, economic outlook, and issuer financial status are ever fluid. Consequently, professional bond managers are continuously reshaping their fixed income portfolios in an effort to sidestep the risks and take advantage of new opportunities as they emerge from these changing circumstances.