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Is debt a bond proxy?

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  • Is debt a bond proxy?

    The guys over at the Money Meets Medicine podcast were discussing bonds.

    In regard to portfolio allocation they mentioned that some of them don't hold bonds because they consider student(or whatever) debt as a "bond proxy".

    I understand that there's a million personal reasons to decease/increase the bond allocation in one's portfolio (investment horizon, risk, balancing ease etc...) but I've never heard about considering debt as a bond proxy. What does this mean?

    Thanks, Travis

  • #2
    The debt you owe is a negative bond. You might consider payment of your debts as a bond-type proxy.


    • #3
      I must say, I don't understand that idea either. It seems like saying you're rich in negative money.


      • #4
        The way I see it is people rationalize not holding bonds because they can make more money off of paying down their debt. Why buy a bond with a 2% yield when you can pay off a debt with a 3% interest.
        The the part where this does not hold up is that you cannot rebalance. You cannot sell the bonds if you need liquidity. Possibly if it's a mortgage you could take some equity back out.

        But if you are aggressively paying off your debt you are decreasing your leverage risk so you could theoretically take more risk on the equity side and hold fewer bonds.


        • #6
          its like its never been brought up before....


          • #7
            Having debt is like having a short position in a bond. All things being equal, it does not make mathematical sense to have a $25,000 car loan at 3% while having a $25,000 CD paying 1%.

            Of course there are other issues like liquidity, asset location, whether interest is deductible, etc.


            • #8
              In the past, I have heard a comparison of a physician's income as being a bond proxy in terms of stability of income / low risk of job loss etc with the opinion that physician's can take more risk with their 'investments'. Covid-19 appears to have debunked this statement and associated opinion. IMO, a bond allocation within an investment portfolio is to dampen equity returns in line with a person's risk tolerance/time horizon for withdraw.


              • #9
                Thank you, understood.