Chapter 13. Giving Credit to the Bond Market

 

If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem.

 
 --—JEAN PAUL GETTY
 

The importance of money flows from it being a link between the present and the future.

 
 --—JOHN MAYNARD KEYNES

Many equity investors consider the bond market a place to preserve capital, not grow it. But the bond market—and the credit market in general—offer indicators that make them well worth following.

To appreciate the indicators the credit markets offer, it's important to understand the differences between equity and debt investors. Equity holders care about return on principal. People and organizations that lend money, on the other hand, care about return of principal. Because credit providers can receive no more than the face value of a bond or loan, they focus much more on what can go wrong. Equity investors, by contrast, participate in a company's growth, and they spend a lot of time thinking about what can go right. Bondholders' natural skepticism can be a nice counterweight to equity's natural bullishness.

The relationships between bonds with different levels of principal protection give an ongoing barometer of risk tolerance in the credit market. Shifts in lenders' risk tolerance often lead changes in risk tolerance among equity investors.

Bonds can also presage price changes in the equity markets. Credit is an economy's lifeblood. Companies facing tougher lending terms will make less profit in the future, ...

Get Market Indicators: The Best-Kept Secret to More Effective Trading and Investing now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.