In July, there were more investors that left the bond market than in any other month in the history of the stock market. Adam Moeller, President of AJM Financial in Denver, Colorado, thinks that's going to continue to happen during this current "bond bubble."
Bonds are loans investors make to the bond inquirer, says Moeller, and are often referred to as debt security of fixed income security. Moeller says investors may be attracted to bonds for several reasons, including income generating ability, capital generation and to add to a diversified portfolio.
While there are a wide variety of bonds from which to choose, they all come with varied risks, such as investment risk, inflation risk, market risk, call risk, interest rate risk and duration risk, according to Moeller. Since interest rates are so low, they'll eventually go back up so the outstanding bonds, particularly those paying a low coupon rate with high duration, are going to experience significant market drops.
Moeller says that the last interest rate shock was in 1994 and the federal government increased interest rates by 2.5%, which is very realistic currently.