$145 Trillion Is BORING? Bonds Explained

CHRIS SIPES CFP®: What are we talking about today? Bonds.

CHRIS SIPES CFP®: Right, don't turn it off yet. We're just getting started.

DANO WEIR: No, no, yeah. What about Bonds?

CHRIS SIPES CFP®: Bonds. Fixed income.

DANO WEIR: Okay.

DANO WEIR: Chamomile.

DANO WEIR: Fixed. Yeah, yeah, yeah.

CHRIS SIPES CFP®: Fixed it. Okay. Are they important?

CHRIS SIPES CFP®: Some would say so, yes. Some would say so.

DANO WEIR: Financial confidence for your hip pocket. Money is really just energy. If you're checking out, It's All Money.

DANO WEIR: Hey, welcome inside the Sonoma Wealth Conference Room. My name is Dan O'Weir. I'm the Marketing Director of Sonoma Wealth Advisors. Joined by our managing principal today, Chris Seif, CFP. As you can tell from our little bit at the start there, our cold open, as they say in the industry. We're talking about Bonds today, which, Chris, some people find a little sleepy.

CHRIS SIPES CFP®: Yeah, and they really shouldn't because there's a lot going on there. Once you kind of know, and it's an exciting place, Dan. Let me take you to this exciting place known as the Bond market.

DANO WEIR: So we're having a little bit of fun with it, speaking to what you might think about it, which is what a lot of people think about it, but it is likely in your portfolio. And we're going to talk about why it matters. And it actually impacts a lot of things in your financial life. So Chris, let's start here with this Bond explainer kind of episode.

DANO WEIR: What is a Bond? Why does the Bond market exist roughly?

CHRIS SIPES CFP®: So if you think bigger picture, there's kind of two different things you can do with your money. This is money that you're not using for checking, you know, like day-to-day stuff, but there's two different things you can do. You can loan it out or you can be an owner. Okay.

DANO WEIR: Okay.

CHRIS SIPES CFP®: If you're an owner, they call that equity investing. You're a stockholder. Okay. You're, you're an owner in the company.

CHRIS SIPES CFP®: If you are loaning the money though, that's where the Bond market comes into play. And so for as pretty much as long as man has existed, we've needed to borrow money for something. And that's what facilitates the need for a Bond market.

DANO WEIR: Men and women borrowing money, going into debt.

CHRIS SIPES CFP®: Going into debt.

DANO WEIR: Since the beginning of time.

CHRIS SIPES CFP®: It's a thing. Yeah. Yeah.

DANO WEIR: I think what's shocking to me as I research this episode, and I knew this a little bit already.

DANO WEIR: The size of the Bond market will blow people's minds i think because it's not something you know when you're at the barbecue people are hey tell me about your Bond picks you know it's just not off the top of everybody's it does not maybe to you Chris this is a side note but the Chris is like we make fun of Chris at the firm about this because he thinks about it he has knowledge of it and yet you It's kind of funny, like, oh, Chris, how's your Bonds doing?

CHRIS SIPES CFP®: Somehow I got painted as the Bond guy. I have no idea how this happened.

DANO WEIR: But the size of the Bond market is massive.

CHRIS SIPES CFP®: Yeah. Yeah, it's very large because there's such a need to borrow money. So think about it like if you're going to go buy a house, most people are going to borrow money to do that. That comes from a pool of money that is tied to the Bond market. The government needs to borrow money. They do a lot of it.

DANO WEIR: They do.

CHRIS SIPES CFP®: So they go to the Bond market. So think about all that borrowed money in the system. And that's why it's, it's pretty much almost as large as the, as the equity market.

DANO WEIR: Here we go. We go. Here's the numbers. And this is coming from the SEC. This is coming from one of my other sources on it. Smartasset.com, shout out to them. And thenationaldebt.us. The US equity market, which a lot of people would call the stock market, right? Rough size.

DANO WEIR: And all this data is as of today's recording, which is June 2nd, 2026. So obviously this fluctuates. But as of this recording, us equity market is 62 trillion. The us Bond market is 58 trillion. So right there, you know, it's, it's shocking to me that it's like basically the dark side of the moon in that it's a whole other half of the financial world in the United States.

DANO WEIR: That is just not top of mind because it doesn't have necessarily the propensity for that. Explosive growth. So therefore not interesting, interesting. And we'll get into more of the, some of the functional aspects of them in a little bit. Yeah.

CHRIS SIPES CFP®: And what's interesting is if we could map that over time, it used to be that the Bond market was much larger. You know, now when people think about investing, they mostly think about the stock market, but there was a long period of time where investing meant the Bond market.

CHRIS SIPES CFP®: And so So... We're at the, you know, we've been in a bull market in the U.S. For 15 plus years now. And so that equity market valuation has grown a lot to kind of match the size of the Bond market. But most of the time, the Bond market's larger.

DANO WEIR: Which we, on our other show, On The Markets, we talk about all the time. You know, when we look at FinViz and we look at that heat map and the size of the squares, the size of those companies, that Mag7 is what just blows the rest of the Bond market out of the water because you've just got these, some of the of his handful of these companies have just gotten so massive.

DANO WEIR: And yet, if you want to talk massive, if we look at the global Bond market, now we said US equity market is 62 trillion, the entire stock market, your Apples, your Teslas, your soon to be SpaceX's, the global Bond market is 145 trillion.

DANO WEIR: So do that math backwards. That means that the US Bond market, the United States alone holds 40% of the world's debt. So are we really the richest country or not, you know, since we're 40% of the Bond market? Kind of interesting.

CHRIS SIPES CFP®: Yeah.

DANO WEIR: So an SEC study from 2022 shows, again, we've said people don't necessarily think of Bonds top of mind. This SEC study showed only 5% of people directly hold Bonds. But estimates show more than half of U.S. Households indirectly hold them through mutual funds, ETFs.

DANO WEIR: And 401ks right so there's the potential for our clients watching right now our prospective clients they may have Bonds and they don't even know it how what what is what is that within it within a mutual fund is it is it a Bond fund is there what what is the what are the elements within a mutual fund or an etf that that.

CHRIS SIPES CFP®: Incorporate Bonds yeah so so you're right most of most households are going to own it Probably through their 401k, because if you go into the 401k and they'll give you kind of the different options to to to invest your money, they're mostly a a flavor of stocks. Or Bonds, and then you get a mix of the two, right? And so a lot of people will approach their allocation. Like I want a certain percent in stocks.

CHRIS SIPES CFP®: I want a certain percent in the 60, 40, right? I've heard that a lot being the most common 60% stocks, 40% Bonds. And so most people will have that exposure through a fund and the fund is just going to own. You know, a whole bunch of individual Bonds in that one fund so that you're not, you know, tied to any one individual Bond, but rather you have thousands of Bonds in most funds.

DANO WEIR: And so then you as the holder of that fund are really just tracking? Tracking the price of that Bond and not holding it itself.

CHRIS SIPES CFP®: Right. You're kind of tracking the price of the pool of those Bonds. So those Bonds are going to be maturing.

DANO WEIR: Right.

CHRIS SIPES CFP®: You know.

DANO WEIR: So sort of like owning a Bitcoin ETF versus owning raw Bitcoin.

CHRIS SIPES CFP®: Right. Right. Yeah. Yeah, exactly.

DANO WEIR: Different types of Bonds. Are you still with us? Need a coffee? Hit subscribe. You can get more great episodes like this. More Bond episodes. Only this one's on Bond.

DANO WEIR: Different types of Bonds. So what are some of the different types of Bonds that are out there? Some of the different flavors.

CHRIS SIPES CFP®: So I think the best way to think about Bonds is back to the loan part. So you're loaning your money out. So think about the characteristics of a loan. Usually when you give a loan out, there's a time period. I'm going to lend money to you, Dan. I'm only going to do it for a certain period of time.

DANO WEIR: Sweet.

CHRIS SIPES CFP®: Right? Or if you're going to go get a mortgage, they have different time periods that you can, but there's usually a time frame tied to it.

CHRIS SIPES CFP®: It okay okay then there's going to be an interest rate how you know how much do you have to pay as the person borrowing that money how much you have to pay for it so what's the price of that money over that time period that price is going to be determined by what kind of borrower you are Have you borrowed money before?

CHRIS SIPES CFP®: Did you pay it back? Do you have a good job? Are you already in a lot of debt to the point where I'm like not really sure I'm going to get my money back?

CHRIS SIPES CFP®: Or do I know that I'm the only one loaning to you and there's a high probability? I'm going to get my money back. So all of those are going to affect the terms of how we're going to loan each other, go into this loan together. Okay. Right?

CHRIS SIPES CFP®: So when you go to make these loans, you can make loans to the government. Federal government, the state government, local government. You can make loans to corporations.

CHRIS SIPES CFP®: There's all different types and those are all different types of Bonds in the Bond market.

DANO WEIR: Okay. So corporations, so you're saying some of these big businesses, some of these mag seven are issuing Bonds themselves and taking on debt.

CHRIS SIPES CFP®: Yes.

DANO WEIR: That's how they're borrowing instead of borrowing it from the bank?

CHRIS SIPES CFP®: Yes. And a lot of them actually have extremely good credit, as you might imagine, some of them even paying lower rates than what the government would be paying. And so they'll go to the Bond market and say, hey, we want to build this data center and it's going to cost us a bazillion dollars. We need to raise that money at a certain percentage and they're going to borrow it from the Bond market.

DANO WEIR: Okay. So we've got U.S. Treasuries, which are federal Bonds. We've got municipal Bonds. We've got corporate Bonds. And we've got, what are agency Bonds?

CHRIS SIPES CFP®: So agencies are like this quasi gray area, right? Because they are governmental. They're not officially governmental, but they are implicitly backed.

CHRIS SIPES CFP®: You explicitly but implicitly backed by the government like the financial version of the postal service maybe i guess i don't know enough about the postal service to answer that but but mortgages for example like we've made a public policy that we want people to own homes and so they've created these agencies fannie mae freddie mac sally sally may for for student loans so that they're they're a buyer of this debt to create a market for it.

CHRIS SIPES CFP®: And so most of the time when you're going to go get a loan, if it's, if it's what's called a conforming loan, it fits into this box of, you know, you've checked off all the boxes. It goes into one of these agencies that's going to purchase that, that mortgage from you.

CHRIS SIPES CFP®: And so they're, they're considered to be lower risk than you non-agency debt because they sort of have the backing of the government. Basically, most people don't think the government would let them go kaput.

DANO WEIR: Okay. When you, you as a financial advisor, and you're incorporating Bonds into a client's portfolio, do these types of Bonds weigh in and say, Oh, this type of client is in this life scenario. They should get this type of Bond versus another type, or is it just kind of, I mean, are there differences as a, as a purchaser of them?

CHRIS SIPES CFP®: Yeah, it is. It is client by client. And one of the biggest determinants there is what their tax bracket is going to be because take municipal Bonds, for example, those have tax advantages that other Bonds do not. So a standard Bond, if you think of just like a standard corporate Bond, the interest that you receive is income, right?

CHRIS SIPES CFP®: So that gets taxed as income. Okay. But then when you have federal and local debt, they don't tax each other. So if you buy a Bond from the U.S. Treasury, your state isn't going to tax that income, right? So... And then if you are in a municipal Bond, most of those do not get taxed by the state or the feds.

DANO WEIR: But there is the return lower?

CHRIS SIPES CFP®: But the return is adjusted for that. Right, okay. So they adjust for that. And so let's say you're a resident of a high-tax state like California. If you buy a California municipal Bond, sometimes your what they call tax equivalent yield. So basically, what do you get to keep after your taxes might be better than buying some other type of Bond. It might be higher.

DANO WEIR: So depending on your own tax situation, yes, you would want to buy this particular Bond based on what you're already paying in taxes. Correct. So give me a scenario. I'm a high earner. I make $250,000 a year. I'm in a high tax bracket. Bracket. What type of Bond would make sense?

CHRIS SIPES CFP®: Depends on what kind of account it's going in, right? Because if it's in your retirement account and that's not getting taxed as you go anyway, then it doesn't matter. You're not going to take that lower yield. In a, in a municipal Bond, why would you get paid less? You're getting no tax benefit from it.

CHRIS SIPES CFP®: So you don't want to have a municipal Bond in your, in your retirement account, all things being equal. Now there's also a second part of this, which is what are the conditions in the lending market? Like, is, is it a very like. People have a high appetite for risk.

CHRIS SIPES CFP®: People are not that worried about defaults. They're not worried about the economy. There's all different kind of things going into the Bond market to say, how much are you getting paid to take on the extra risk from maybe a company that doesn't have as good of credit versus a municipal versus a treasury?

DANO WEIR: That's the junk Bond market?

CHRIS SIPES CFP®: They call it junk Bond.

CHRIS SIPES CFP®: Bonds yep and that is that is for companies that have a less than stellar credit so that would be a corporate Bond that from a from a from an iffy company yes and so when you look at the spectrum the gold standard are treasuries issued by the u.s government at least in today's Bond market backed by all the guns backed by all the guns and the navy and you know everything right so those are considered the kind of the basis which all...

CHRIS SIPES CFP®: Really all of finance, but definitely all of the Bond market is based on. Okay. Because you as an investor are going to look and go. I can lend my money to the U.S. Government, and I'm very sure I'm going to get that money back because they can print it, they can tax, they have the military, blah, So I can put it there.

CHRIS SIPES CFP®: That's kind of my base starting point. So if they're going to pay me, let's just use round numbers, let's say 5%, if the U.S. Government is going to pay me 5%, then I'm going to need something to entice me to go somewhere else.

CHRIS SIPES CFP®: To lend my money to somebody I might not get it back to. Right. If I'm going to say, for sure, pretty sure I'm going to get the money back here at 5%, why would I go lend it to somebody that I probably, I might not get it back for less than that? You're going to want to spread.

DANO WEIR: Yeah.

CHRIS SIPES CFP®: Right now, that risk spread is very low.

CHRIS SIPES CFP®: Investors are not very worried about the default between those two and so that spread is really low you're not getting paid that much more to go lend it to the junk Bond market as an example that changes in times of stress times like Covid was probably the last you know big time where it's like okay now you're getting paid a lot more to lend your money to that sketch riskier yeah because everybody's like oh well i don't know i don't know what's going to happen you know, okay.

DANO WEIR: Well, we've talked about it. We alluded to it. Let's get into the functions of it now, how, how a Bond actually works. So, we're going to try to keep this super high level and conversational trying here.

CHRIS SIPES CFP®: Conversational Bonds. So just conversating about Bonds.

DANO WEIR: So I want to buy from you a hundred thousand dollar Bond. You're the federal government. You've stuck out a piece of paper to me and I'm going to buy that. What happens next? So I give you $100,000? What are the functional aspects of buying a Bond and then the coupons and their end?

CHRIS SIPES CFP®: Okay, so if you're going to go buy an individual Bond, which we already talked about, maybe 5%?

DANO WEIR: Very low.

CHRIS SIPES CFP®: Have. But it's... It's a market, so you're going to go to your broker-dealer of choice, and you're going to say, I'm looking for a Bond issued by the U.S. Government. And it's going to populate everything from very, very short term all the way out to 30 years. So you got to decide first off, like, how long do I want to loan this for?

DANO WEIR: You can have it for 10 years for me.

CHRIS SIPES CFP®: Okay. 10 years. That's a very common Bond, the U.S. 10-year treasury. So you're going to go look up 10 years and it's going to say.

CHRIS SIPES CFP®: You can buy on the run Bonds off the run Bonds which is basically just did they recently issue it or am i buying it from somebody else okay okay because maybe you already have a 10-year Bond and you're looking to sell it and i'm going to buy it okay from you so and that's going to mature sooner maybe maybe it's going to mature in four years still like maybe it started out as a 20-year Bond but you only got 10 years left i see okay okay okay yeah so they they they sort it by when And is it mature?

DANO WEIR: Okay.

CHRIS SIPES CFP®: So that's, that's the, that's the key thing. Now there's going to be a coupon tied to that. The coupon is what it pays you an interest.

DANO WEIR: Okay.

CHRIS SIPES CFP®: Okay. And that comes from back in the day. They used to actually have coupons on the Bond. Make it happen. I think we have a picture of the Bond.

CHRIS SIPES CFP®: So these were, you may not be able to see it, but these were bearer Bonds, meaning that if you had that little coupon in the bottom, you'd cut out that little coupon. And if you were the person to bear that, that you would be paid the interest.

DANO WEIR: And I think I brought this into the episode today. And if you're listening to the episode, we have on our screen, it's a looks like a document that you would imagine as a federal document from 1979. It's got Abe Lincoln's picture on there looks similar to a piece of cash. And it's the United States America to $1,000 Bond.

DANO WEIR: That you would buy it's a nine percent treasury note and then attached to the bottom of it are these little perforated tear-off coupons just scroll down for me for that and they say 45 and so am i give how much money am i giving you for this thousand dollar Bond i'm giving you a thousand dollars.

CHRIS SIPES CFP®: In a vacuum yes they're sold at face amounts of a thousand dollars now you see that interest rate though where it says nine percent Okay.

DANO WEIR: So it's, so when I, when it actually matures, I'm getting nine, I'm getting what? Nine.

CHRIS SIPES CFP®: No, when it was issued, when it was issued on that date, it was paying 9% if you paid a thousand dollars for it.

DANO WEIR: Right. Okay.

CHRIS SIPES CFP®: So if you scroll down a little bit, you see this, say $45. You're going to get $45 when you cash those in. You get two of them a year. So $90 a year.

DANO WEIR: Right, right, right.

CHRIS SIPES CFP®: Which is where the 9% comes from.

DANO WEIR: Okay. So that's where it comes from. Back to our example. I'm buying, it's $100,000 10-year Bond from you. And we were on the coupons. So that you're saying, so not only am I getting the appreciation and the Bond value. But I'm also getting possibly, possibly I'm also getting the coupon. Go take it from there.

CHRIS SIPES CFP®: Yeah. So, so you're getting the coupon when this was issued, it was 9%. Now, then it's going to go into the market and then interest rates are always changing literally every day. So 9% could be good. Like in today's market, imagine if you could get 9%, like if I said hey I'm going to sell you a treasury it's going to to pay you 9%, you'd be like, great, let's do it.

CHRIS SIPES CFP®: But those are going to fluctuate. So that is going to determine the price on your Bond. So your $1,000 is going to change based on that interest rate and how attractive that interest rate is in the market.

DANO WEIR: Okay. So the changing price when we've on again, our other show On The Markets, and we'll look at this in a moment. When we look at the price of the 10-year treasury, when we look at that rate on the 10-year treasury, if you're holding Bonds, you want that to go up?

CHRIS SIPES CFP®: No. Okay.

CHRIS SIPES CFP®: Think of it like a teeter-totter. And if interest rates go down, the value of Bonds go up. Why? The principal value of Bonds go up.

DANO WEIR: Why?

CHRIS SIPES CFP®: Well, this is a perfect example. Okay, 9%.

CHRIS SIPES CFP®: Today's markets, say 5, just for easy math.

CHRIS SIPES CFP®: You can only get five percent on a on a on today's market so if you were going to sell that Bond in today's market you're going to get a premium for it you're going to get more than a thousand dollars for it to lower that nine percent to five because that's today's market of like what people want for the yield okay so when someone buys we're mixing examples a little bit because i put this on the screen but that's okay let's let's run with this for this one that's on the screen.

DANO WEIR: This $1,000 9% Bond.

CHRIS SIPES CFP®: Yeah.

DANO WEIR: Rates now today are 4%, let's just say, a difference of 5%. So if you bought this, you're taking possession of this, and now it's going to pay you 9%.

CHRIS SIPES CFP®: When it matures. Yeah, because the market's competitive, you're going to get more for that Bond so that it matches what today's market value is. Okay. So today's yield is 4% or 5%.

DANO WEIR: Right.

CHRIS SIPES CFP®: So that 9% Bond, the principal is worth a lot more so that that interest rate will match what today's is.

DANO WEIR: Okay.

CHRIS SIPES CFP®: So like you would have to pay more than a thousand dollars to get that Bond to match today's interest rate.

DANO WEIR: Okay. And then if you bought that from me, then you would also be assuming all of the coupons, right? So that's why you would want that.

CHRIS SIPES CFP®: Yes, and you're still going to get the $45 for that coupon, but you're getting $45 now on $1,400 or something, whatever the math is to make that 5% instead of...

CHRIS SIPES CFP®: Instead of the 9% that's current. So what you need to know as a bondholder is you're going to get those coupons. And if interest rates go down, your Bonds are worth more. Because it's like, hey, I would. I was getting 9% and now the market only is asking for five. So my 9% Bond is worth a lot.

DANO WEIR: Right. Right.

CHRIS SIPES CFP®: Now, vice versa, if current rates go up to 15%, which they've been that high in the, in the federal. Treasury market, and your Bond's only paying nine, you're going to have to get those numbers up to get into today's market because nobody's going to, nobody's going to buy your Bond paying 9% if current rates are 15, right? Does that make sense?

DANO WEIR: It does. And this is just a hot tech opinion, but I think that in knowing people, and in knowing how human brains work and just my experience in life, I feel like people can conceptualize this still when this was existing. I feel like people got it. And I feel like people get cash.

DANO WEIR: And as soon as you take this and shove it into the internet and everything's bits and bytes, everybody's lost. And I don't know if that was the goal, financial industry, but I feel like some of that is why there's such a disconnect and such a misunderstanding. Of the Bond market. Is because. It's just. It's just. It's floating out there. It's vapor. People. It's not tangible.

CHRIS SIPES CFP®: Right. Well, Bonds are different than stocks in this huge way, which is that when you buy a Bond, you know what the maximum possible upside is, which is you get your money back as promised. You also know what the downside is, which is you don't get your money back, you know, and versus a stock when you buy that, the upside is really unlimited. You don't know.

CHRIS SIPES CFP®: The downside is you lose the money that you put in.

CHRIS SIPES CFP®: But with Bonds, because there's a limited upside.

CHRIS SIPES CFP®: They're a little more predictable in, in how they're paid and everything. And so you kind of know going in a little bit more what to expect, especially when you buy a fund, because you're buying thousands of these Bonds. And a good rule of thumb is that whatever the yield is that you buy that 10 year, let's say you buy a fund, that's a 10 year treasury fund.

CHRIS SIPES CFP®: It's got a, a maturity of 10 years on average, and that's paying four and a half percent, you are very likely to receive four and a half percent over that 10 years. Prices are going to go up and down. You probably are going to buy and sell over that period of time. But if you just held that fund for 10 years, very likely you're going to look in the review and say four and a half percent is what I got.

DANO WEIR: And that is the key piece why people joke and say that Bonds are boring is... Because you know the ending. You know ultimately high percentage chance that it's going to be 4.5%. Yeah. Versus, oh, my monster stock is, I don't know. I mean, that's what people want to brag about, and they made their pick, and they also don't tend to crow about one inch down 50%. But.

DANO WEIR: That is why, you know, Bonds are boring. And yet as an advisor, you include them in someone's portfolio for what reason? What is the key reason that Bonds would be considered?

CHRIS SIPES CFP®: The biggest thing is for diversification because they are a different asset class than stocks. Now, sometimes they move more along with stocks than at other times, but for the most part, they're not the same. And by diversifying those return streams, Bonds do well in different environments than stocks do.

CHRIS SIPES CFP®: So there's going to be different economic environments at different times. And that's the key reason for holding Bonds.

DANO WEIR: It seems like nothing is certain, but it seems like some stability in the portfolio.

CHRIS SIPES CFP®: Yeah, they're more stable. And because if you think of a soup line, we talked about this a little bit in the pre-show.

CHRIS SIPES CFP®: There's a cauldron of soup. There's only so much soup. And then you've got a line. Now, depending on how long that line is, there's a higher probability of getting some soup, right? If you're towards the front of the line, you're pretty likely to get soup. If you're way at the end of the line, there might not be soup for you at the end, right?

DANO WEIR: So for a corporate Bond holder, for example, they're further closer, they're in the front of the line versus an equity holder?

CHRIS SIPES CFP®: Yes. So in this analogy, if that's a company and there's only so much money in the company to go around. Around, the bondholders are at the front. They usually have a claim to something. A lot of Bonds are collateralized by something and or they are further up what they call the capital structure than the stockholders. So if there's only so much money, the bondholders are more more likely to get paid than the stockholders.

DANO WEIR: So again, more stability, more reliability, kind of what you're talking about versus, you know, in a portfolio holding Bonds versus equities.

CHRIS SIPES CFP®: Correct. Yep. Now that's been shaken recently because we just had... Had the worst Bond market in history in 2022. So a lot of people are really gun shy to even talk about Bonds or own Bonds at all. And that's because going back to the teeter totter analogy, interest rates went up a lot in one year, and it went very quickly from zero to 5%, roughly, all in one year, which was very, very hurtful to Bonds.

CHRIS SIPES CFP®: And so, so bondholders really got burned and a lot of people are having a tough time kind of coming back into the Bond market even though the rates have kind of returned to a more normal level where we're back to you know four or five percent area for a lot of Bonds which is you know much more in line with historical averages basically.

DANO WEIR: Could we look at a little history real quick you want to look at the yield curve what do you say?

CHRIS SIPES CFP®: There's a lot of information in the Bond market because of the fact that They, they have more risk given that they, they can only have so much upside. So they, there's a big saying that, you know, the fixed income market, the Bond market is the quote unquote smart money.

CHRIS SIPES CFP®: They do the underwriting to make sure that they're, they're likely to get their money back. And so there's a lot of information in the Bond market. A lot of the stock traders would say, you know, if I was interested in a certain stock, I'm going to call the Bond. Desk and see what's going on in the Bond market for that particular stock.

CHRIS SIPES CFP®: Because if that interest rate is really high, if the Bond market is very thin and not many people are willing to lend to that company, that could be a sign that there's stress in that company that is going to play through to the stock market as well.

DANO WEIR: Right. What are we looking at here, Chris?

CHRIS SIPES CFP®: Okay. So this is part of the yield curve. Now, what's the yield curve?

CHRIS SIPES CFP®: That is showing you what yields are from short term to long term. Now, the natural state of the yield curve is sort of like a inverse Nike check. So, and this makes intuitive sense if you think about it. If you're going to loan your money out for a long period of time, I'm going to say, Dan, I need to borrow your money for 30 years. You're probably going to want. A higher interest rate.

DANO WEIR: 10% given either. I'm not for that long. Yeah.

CHRIS SIPES CFP®: Then if I say, Dan, can you lend me this money for a week? I'm getting paid in a week. I got you.

DANO WEIR: Yeah.

CHRIS SIPES CFP®: Okay. So, so the natural state of the yield curve is that shorter term interest rates are lower than longer term interest rates. And if you, if you plot that out, that's the yield curve.

CHRIS SIPES CFP®: Now, Now, you might have heard of the inverted yield curve.

DANO WEIR: Correct.

CHRIS SIPES CFP®: A lot more recently, and that's because sometimes, it's not the natural state, but sometimes short-term interest rates go higher than long-term interest rates.

DANO WEIR: So for whatever reason, well, for... Potential reasons, you're going to pay me more for a shorter loan than you would if I took a longer loan.

CHRIS SIPES CFP®: Yes, exactly. I'm not sure why that's distorting there, but, 0% is kind of mid screen there. And so what this is showing is if the lines above the zero, currently it's at 0.69, which means that the spread here, you're getting paid 0.69% more to lend your money for 10 years to the government than you would to lend it to them for three months. Okay.

CHRIS SIPES CFP®: So not much of a spread. The yield curve, as they would say, is pretty flat. It's pretty flat.

DANO WEIR: So if I was trying to read a narrative there, that's the Bond market saying, we have uncertainty about the next 10 years. So we're not going to commit to a high return for you because we're not going to lock ourselves into that. So if you want a higher return, we can do short term. We can do that right now. But long term, who knows?

CHRIS SIPES CFP®: Right. Interest rates are just the price of money. It's the price of money. And so longer term, the market interest rates can fall when there's not a high demand for money. So think about in the economy when there's not a lot of people that are able to or want to borrow businesses, people, et cetera, there's a less demand for money. The price of the money should fall.

CHRIS SIPES CFP®: Okay. So what the market's saying right now is like over the longer term, we're not really sure that there's a higher demand for the money than there is right now.

DANO WEIR: Okay. Okay.

CHRIS SIPES CFP®: And the only reason why you would buy that longer term is because you expect.

CHRIS SIPES CFP®: The shorter term rates to fall over time you know so this is millions and millions of people around the world pricing what what that that cost now when it goes inverted historically can't see the lines very well but those gray lines are recessions and typically you get inversions right before you get in a recession i say typically because it didn't happen this last time in 2022 at least where we're at today it has not happened because you can see that inversion when that line goes below zero meaning that the short-term rates were a lot higher than the long-term rates.

DANO WEIR: And now this inversion, by the way, is... Motley Fool and Yahoo Finance and every...

DANO WEIR: Keyboard warrior who writes financial articles, this is the headline you see when they say, this line just did this thing and it means this, right? This is every time this happens, then this happens, right? So this is one of those things that people point to as a major indicator of things to come.

CHRIS SIPES CFP®: Yeah. And going back to the discussion On The Markets, that's longer term investors saying, we don't think there's going to be a lot of demand for money. And therefore, interest rates are going to drop. There's not enough growth to keep the interest rates higher. There's not enough inflation expectation to get.

CHRIS SIPES CFP®: So they were willing to take a lower compensation for those longer term rates based on that assumption. Now, usually when that happens, it's like, well, okay, then the economy should start to spit and sputter and you should start, you should see a recession when Bond investors have that expectation. It's not right away. It's not like as soon as it goes inverted, you should see that recession.

CHRIS SIPES CFP®: It's, it's, I think on average around 14 months from the inversion date to, to when you get a recession call. So we had that going into 21, 2022, a lot of people would say there was a lot of indicators that would have said we were in a recession, but they never officially called a recession during 2022. So, you know.

DANO WEIR: Did it happen? Did it not? Did they print their way through it? Who knows?

CHRIS SIPES CFP®: It wasn't an official correct. So, but anyway, now we're back to more of a flat yield curve where there's this tiny spread between the long-term and the short-term rate. Rates.

DANO WEIR: There's a lot.

DANO WEIR: Thank you so much for hanging with us through the episode. As with all of our episodes, the end of the episode is not, hey, buy some Bonds. Our episodes are educational. And particularly for me, this is one I really wanted to host because it's something I had no knowledge of before I worked here.

DANO WEIR: And i knew that they existed and you hear about it and you know when you're at your company and they give you the 401k options and you have no clue and you just check never with any of our 401k advisors but perhaps at yours you you see it on there and and it just is not something that makes a lot of sense.

DANO WEIR: So the goal for today's episode was education, was clarification, and was to provide some insight on why this could be in your portfolio and why when you're on a call with Chris, he says the things that he does.

CHRIS SIPES CFP®: It's been a long time. Time since you've seen the benefits of Bonds, but part of it is the coupon. You get that income coming in. But the other part is that when those interest rates drop, typically in recessions, Bonds tend to do well. So think about the great financial crisis in 2008. That was a deflationary recession, meaning that prices dropped and interest rates dropped.

CHRIS SIPES CFP®: Were you a fixed income Bond investor or you had that portion in your portfolio during the great financial crisis? It did really well, especially treasuries. The safer the Bond, the better you did. And, so that's the, so what, why would I want it? Well, because occasionally there were these things called recessions. We used to get them. We used to get sustained downturns in the market.

CHRIS SIPES CFP®: It's been a long enough time where people are seriously going like, why would I own Bonds? We're not, you know, it's been so clear. There's not been any storms for so long, but there will be more storms. And, typically in storms, the Bonds, the Bonds are, are, the part of the portfolio that continues to do well. And that's the, so what and why. You would want to continue to hold them.

DANO WEIR: Never advice, always education. Your situation is unique and we hope you've learned something from today's episode. He's Chris Sipes. He may be your advisor. He tells you these things on Zoom calls and if he's not, he could be or Darren Blonsky or Shelby Wyrick or Clay Dunkel or Gaetano Bettinelli or any of our advisors.

DANO WEIR: You can learn about our firm at SonomaWealth.Com. Book your wealth analysis there. Wherever you found this show, whether it's on YouTube or Apple Podcasts or Spotify, interact with it.

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DANO WEIR: And we would love to hear from you. My name is Dan O'Weir, and we'll see you next episode. Thanks for watching and listening to It's All Money. We hope today's episode shared information to increase your financial confidence. Now is the time in the show for the voiceover with a bunch of words at the end.

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