What Are Bonds and Why Does Smart Money Live There Part 2 | What the Wealthy Do Ep. 16

Bonds do not exist in a vacuum. They respond to what is happening in the economy, what the Federal Reserve is doing, and what risks are present in the market. And if you understand those relationships, you can predict how bonds will perform, how stocks will perform, and how to protect your portfolio when things get volatile.This is Episode 16 of What the Wealthy Do, Part 2 of the Bonds Series. Last week we covered the basics of what bonds are and how they work. Today Stephanie Dorsey goes deeper into two of the most powerful concepts in finance: the relationship between interest rates and bond prices, and the yield curve.The single most important rule in bond investing is that bond prices and interest rates move in opposite directions. When rates go up, bond prices go down. When rates go down, bond prices go up. Stephanie walks through exactly why using a real example, and what it meant for everyday investors when the Federal Reserve raised interest rates from near zero to 5% in just 18 months in 2022. Some bond funds lost 15 to 20% of their value that year. Investors who understood this relationship either held to maturity or bought bonds at a discount to lock in higher yields. The ones who did not understand it got crushed.The second concept is the yield curve, which Stephanie calls the bond market's crystal ball. The yield curve shows what return you would earn today if you lent money for different lengths of time. A normal yield curve slopes upward because longer term bonds pay more than shorter term ones. But when it inverts, meaning short term bonds start paying more than long term ones, it has predicted every major recession in the last 50 years, typically six to 18 months before it happens. It happened in 2006 before the Great Recession. It happened in 2019 before the COVID crash.Sophisticated investors watch the yield curve obsessively. And now you will too.Join the next Sovereign Collective cohort for high-earning Black women ready to build real generational wealth: joinsovereign.coThis podcast provides financial education and not financial advice.