Simple Does It: Bond Bubble

There's a lot of talk in the financial sector about the notion of a bond bubble, but there's no real concrete, simple, or exact definition about this phenomenon. If you like reading things that go along with the "The sky is falling!" mentality, there is an abundant amount of material out there to sift through. Looking for a simple explanation? You've come to the right place!

First Things First: A Bond

No, we're not talking 007 here. In it's simplest terms, a bond is a loan. You, the investor, agree to loan money to a business or government in exchange for a certain interest rate. When the loan is done (aka reached maturity), you'll get back the money you loaned plus any accumulated interest. For more information about bonds, check out Jessica's post.

And a Bubble in Finance Is...?

Here's the thing: the financial world is volatile. Even if you don't know much about stocks, bonds and investing, you probably know about the dot-com bust and the dive real estate took not that long ago. It comes down to something that you learn as a child: what goes up must come down.

So a "bubble," financially speaking, is when something in the financial realm starts to gain a lot of popularity, everybody and their brother buys a piece of it, and the price or value skyrockets. Read a little more in depth about bubbles by taking a look at Christa's bubble post.

Put Them Together

Putting the two ideas together, you can start to piece together a good idea of what exactly a bond bubble is. Bonds, ever that middle ground for investors not wanting to play it too safe or too risky, have shot up in popularity in recent years. Investors have been clamoring to grab a piece of that bond pie, and the result is that bonds cost a lot more yet don't yield as much as might be expected.

What This Means For You

We're certainly not going to say that investors should stay away from bonds; bonds can be a great means of investing. The key to using this bond bubble information is to realize that bonds are not immune to the financial bubble. So gather as much info as possible about the bonds you are interested in before investing; information is the crux of informed choices, and informed choices are a great base for a path to a solid investing future.

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