Are bonds a safe place to be?

Bonds have generally been going up for 30 years. A whole generation of people have grown up and grown used to the idea that bonds are a safe investment. The rise of the retirement account has led to a rise in popularity of bond funds.
It is important to understand the difference between owning A BOND and investing in a BOND FUND. There is a world of difference.
When you own a single bond you have lent money to someone who promised to pay your money back, with interest.(yield) If they don't go bankrupt you get your money back, plus yield. So a large part of your risk is whether you will get your money back.
Another risk to a bond is inflation. If you buy a bond that pays 3% and inflation goes to 4% you are losing 1% a year due to inflation and the eroding purchasing power of your money while you wait for your bond to mature and get your money back. This makes your bond unappealing if you want to sell it. If you try to sell it when inflation is rising and you are getting a low yield, you will have to lower the price to make it a good buy for someone to buy it.
A BOND FUND holds many bonds. They pool the money from many investors and use that money to buy bonds. But the value of a bond FUND is constantly changing as the resale value of the bonds they hold is changing due to inflation, changes in interest rates, or changes in the ability of the bond issuers to pay off the bonds. The bottom line is that the value of a bond fund is constantly changing.
How much the value of a bond fund changes has a lot to do with the duration of the bonds the fund is holding. Duration generally refers to the time left till the bonds mature. The price of a long duration bond will be more sensitive to changes in interest rates since changes in interest rates can change a whole bunch before a long dated bond matures and the money could then be used to buy another bond with higher interest rates.
The value of a bond fund can also change if a lot of people decide to sell that fund. The price goes down, money comes out, and the bond fund manager has to sell some of the funds holdings. Putting further downward price pressure on the bond market in general.
Bond prices have generally gone up for 30 years. This has been due to the low inflation the world over. Yes, I said LOW inflation. The rise of China and Asia as low cost exporters has kept a lid on prices of goods. (Think Walmart) But now that the people in those countries are demanding a rising standard of living they are pushing up demand for the same goods that they produce. They are pushing up the cost of energy. They want cars and refrigerators and all the stuff we take for granted. And oil is getting scarcer and harder to find. And oil is the basis for everything that happens in a modern economy.
The result, in my estimation, will be a steady rise in world interest rates over the next several years. This is the effect of energy feeding through the economy as the advantages of an abundant supply of cheap labor wanes. As this new trend becomes evident, and I think it will become evident over the next few months if not earlier, all of a sudden the light will go on in a lot of heads and bond holders will head for the exits. They will sell bonds. The price of bonds will go down and the yield of new bonds will be higher. The money will have to go somewhere and I think it will be in to stock markets the world over. Banks will be able to lend at higher interest rates and will be more eager to lend, increasing consumption and thus inflation. Until interest rates get too high and the process reverses.
But the point of this article is to warn the innocent holders of "safe" bonds who are invested in bond funds. There is coming a rapid unwinding of the "safety" trade and it will cause a sharp fall in long dated bonds. And it may be the start of a trend that will continue for some time. Many of the people I know personally do not have a clue about the financial markets. (You know who you are.) They follow the advice of the "experts" who tell them to be diversified in stocks and bonds. Many of my friends are older people who are mostly in bonds because that is the standard "wisdom". It used to be the wisdom. I think that 10 years from now many will not think the same....The bond vigilantes are coming. Here is a link that provides further education.
http://news.morningstar.com/articlenet/article.aspx?id=172614
And a chart of the TLT long bond fund. Which way is this going to go??:

Everybody has to make their own decisions and be responsible for them. Mine is only an opinion. Read and educate yourself about bond funds and make an evaluation of the future as best you can. Take into consideration your own personal situation. But please understand that paradigms change. What worked all of our lives may change. It will change slowly with fits and starts, but the time to realize what is happening is near the beginning and not at the end of the process like so many of the public in the financial markets!
Don't be average....
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