Unpredictable Price Movements of Bonds

1. If it is virtually impossible to make worthwhile predictions about the price movements of stocks, it is completely impossible to do so for bonds.
2. In the old days, at least, one could often find a useful clue to the coming end of a bull or bear market by studying the prior action of bonds, but no similar clues were given to a coming change in interest rates and bond prices.
3. Hence the investor must choose between long-term and short-term bond investments on the basis chiefly of his personal preferences.

If he wants to be certain that the market values will not decrease, his best choices are probably U.S. savings bonds, Series E or H.

1. Either issue will give him a 5% yield (after the first year), the Series E for up to 5 ½ years, the Series H for up to ten years, with a guaranteed resale value of cost or better.
2. If the investor wants the 7.5% now available on good long-term corporate bonds, or the 5.3% on tax-free municipals, he must be prepared to see them fluctuate in price.
3. Banks and insurance companies have the privilege of valuing high-rated bonds of this type on the mathematical basis of “amortized cost,” which disregards market prices; it would not be a bad idea for the individual investor to do something similar.

Ref: Intelligent Investor by Benjamin Graham