There’s talk of a bond bubble forming and eventually bursting especially with treasuries. If this happens how would my investment be affected?

How would my investment be affected if the stock market enters a bear market?

Thanks a bunch!

The market value of long term bonds increases as interest rates drop. Since 1985, interest rates have dropped continuously (except for a few intervals) and therefore if you held long term bonds during that time, the market value of those bonds rose. This long term trend has given people the feeling that long term bonds are safe since market values of long term bonds have increased over the past 35 years. See the following chart for the 30 year treasury bond.

http://finance.yahoo.com/echarts?s=%5ETYX+Interactive#chart1:symbol=^tyx;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

If the trend reverses and interest rates rise, the market value of any long term bonds that you are holding will decline. This is because new issues of those bonds will carry a higher interest rate so why would someone pay the same for your bonds with a lower interest rate. The decrease in market value of your bonds raises the yield of your bonds making them competitive with the newly issued bonds.

For example, 30 year treasuries are currently yielding about 3.75% and if the 30 year interest rate goes to 4.75%, any 30 year bond you are holding will decline about 20% in market value to produce the competitive interest rate.

You can continue to hold your bonds until maturity but you will be getting 1% less that anyone else who purchases the same bond on the open market. If interest rates skyrocket, you bonds could have a market value of less than 50% of the purchase price.

Your bonds would likely keep increasing in value the more the economy tanks or the stock market sinks. However, if the economy goes into a strong recovery and the stock market explodes, investors pull money out of bonds and the fed will also tighten causing interest rates to rise.

As far as junk bonds are concerned, they may or may not decline in market value as much as treasury bonds when interest rates are climbing. If the economy is recovering during the interest rate increases, this can possibly make companies more healthy making the default rate on junk bonds to become less likely and possibly moving some of your junk bonds out of junk status which requires a lower yield to be sold on the market.

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I also give a brief explanation of sigma and pi bonds, hybridization, and some of the predictions you can make once you’ve studied the theory.

No, the valence bond theory isn’t perfect (consider the paramagnetic properties of O2). It also does a really bad job of predicting some of the real bond angles (measured by crystallography and spectroscopy experimental methods).

Overall, it’s still a useful explanation.
…It’s helped us understand bonding enough to make predictions about unknown molecules that can be verified by experiment. I find this fascinating! hehe

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