Bonds versus Stocks

Thomas Poufinas (tpoufina@econ.duth.gr)
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Thomas Poufinas: Democritus University of Thrace

Chapter Chapter 12 in Fixed Income Investing, 2022, pp 571-620 from Springer

Abstract: Abstract Bonds and stocksstock(s) are probably the most popular asset classesasset class that can be used for the financingfinancing of enterprises on one hand and the investment of capitalcapital on the other. Before the financial and sovereign crisescrises bonds and stocksstock(s) were known – or better perceived – as being complementary to one another; when the stock markets were going up, investors would reduce their fixed incomefixed income positions and seek superior performanceperformance in stocks – in line with their investment mandates or objectives of course. Such a move would further increase the stock prices and would probably decrease the bond prices—or equivalently increase yields. In a similar manner, when the stock markets were heading south, investors would retreat to the safe harbor of bonds. This would result in an increase of the bond prices—or decrease of yields and at the same time a potential further drop of the stock prices. The last few years this historically observed relation—or perception—has been distorted. Stocks and bonds seem to be moving in parallel and globally, before the pandemic, upwards. This is probably the consequence of the quantitative easing or purchase programs that the central banks have launched. A frequently asked question is whether investors should prefer bonds to stocks; the same applies to entrepreneurs that are looking for financing tools. After having seen the entire spectrum of aspects relevant to fixed income investments and portfolios we revisit the issue of the comparison of bonds to stocks and propose investor and entrepreneur profiles that are suitable for bonds vs. stocks, as well as potential combination of the two. After having read this chapter the reader will be better placed to recommend the conditions that make the choice of bonds over stocks more suitable.

Date: 2022
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DOI: 10.1007/978-3-030-87922-8_12

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