What is a Bull Bond?
A bull bond is a debt instrument whose price is expected to increase in value if the stock market performs well.
Many believe that there is an overall negative correlation between the prices of stocks and bonds, so that when stocks go up, bonds tend to go down, and vice versa. However, with a bullish bond, this correlation is positive. Certain fixed income securities are structured in a way that turns them into bullish bonds.
- A bullish bond is one that performs well when stocks perform well as well.
- The most common type of bullish bond is the equity strand (PO) mortgage-backed security.
- Bullish bonds can diversify an investor’s portfolio in a bull market.
Understanding bullish bonds
A bull bond is a specific type of bond that outperforms other bonds that perform well in a bull market. The most common type of bullish bond is the equity strip mortgage-backed security (POS). While most bonds increase in value in a falling rate market, mortgage-backed securities perform exceptionally well. Bullish bonds can diversify an investor’s portfolio in a bull market.
A mortgage-backed security with equity stripes (POS) is a fixed-income security, in which the holder receives the interest-free portion of the monthly payments on the pool of underlying loans of mortgage securities. POS mortgage securities perform well in a market with declining interest rates because mortgage holders refinance their loans at lower interest rates. Investors are then repaid to their original investment more quickly, increasing the rate of return on the mortgage-backed security.
Although many bullish bonds tend to be mortgage-backed bonds, there are other types of bonds that perform well during a bull market and could also be considered bullish bonds. The general bond market can be classified into corporate bonds, government and agency bonds, municipal bonds, asset-backed bonds, and secured debt obligations (CDOs), in addition to mortgage bonds.
There is a fundamental inverse relationship between bond prices and their yield, which is linked to market interest rates. As a result, most bond prices tend to rise when interest rates fall. In a bull market, there are higher capital inflows into equities that come at the expense of fixed income instruments.
This is because investors see a greater likelihood of generating superior returns in the equity markets. The lack of demand for bonds generally depresses their prices.
What is a bull market?
A bull market is a financial market marked by optimism and investor confidence. The term bull market, associated with trading in the stock market, can also be applied to anything traded, such as bonds, currencies, and commodities.
Because psychological effects and speculation sometimes play a role in markets, market trends are difficult to predict and bull markets are generally only recognized once they have happened. A commonly accepted definition of a bull market is when stock prices rise 20 percent after a 20 percent drop and before a 20 percent drop. The average bull market lasts for nine years. It is quite the opposite, a bear market, which has an average duration of 1.4 years.
A strong or fortified economy, low unemployment, and an increase in corporate profits are characteristics of a bull market. In a bull market, investors are more willing to participate in the stock market to make a profit. Investors who want to profit from a bull market should buy stocks in advance to take advantage of rising prices and sell those stocks once they have peaked.