Andrew Allentuck

Saturday, April 5, 2003

Getting Started in Bonds
by Sharon Saltzgiver Wright
289 pages
ISBN 0-471-27123-3

A recent issue of the British financial weekly, The Economist, suggested that in the next decade or two, government bonds may pay a real return of 3 per cent, which, the magazine said, would be about what stocks pay. If that turns out to be true, then stocks will become investment orphans, shunned by many and chosen by few, for who would take equity risk for a return no better than what government bond offer? That would bring financial markets back to their condition of the 1970s when stocks produced a decade of losses through stagflation. In that decade, cash and bonds were kings.

Ms. Wright, who has been a senior director of fixed income products at a major investment bank, has produced a clear, incisive guide to her subject. She starts off with government bonds that have, in theory, only interest rate risk (though in the 19th century, several U.S. jurisdictions defaulted on their debt), then moves to tax-free U.S. municipals (they are taxable to Canadian investors should they wish to buy them), then moves to corporate bonds, mortgage-backed bonds, global bonds, convertible bonds, bond-like preferred stock, bond mutual funds, interest rate speculation, the implications of bond duration, and some strategies like laddering (spreading out maturities) and barbelling (setting maturities long and short with nothing in the middle).

The complexity of bonds doesn't faze Ms. Wright's descriptive powers, though in a few places she could do better. Bond duration, for example, is not term to maturity. It is a relative volatility measure, similar to beta for stocks, and, as she says, equates the bond to a zero or strip in its term.

Bonds are a huge field that involves, among other things, geopolitics, the business cycle, investor psychology, the performance and outlook for alternative investments, macroeconomics and, at times, crooked dealers and fictitious accounting. Some people may think bonds dull, but they are not. And unlike stocks, the long run returns of which tend to revert to average and tend to converge over time, bonds are always in fluctuation as a result of ever changing interest rates and central bank policies.

Getting Started in Bonds is not the last word in the field, but it is a good first word and for the intelligent novice who is fed up with being ripped off by lousy stocks that fall just after the broker who peddles them has closed the deal, for the person who wants to be able to target an asset balance to begin retirement, or who is just tired of the agony of watching stocks do their crazy dance, itís a good read. If you want to buy bonds and don't have a track record doing it, get this book first. It could save you a bundle.