If we have a depression, what happens to bonds?

Answer 1

They become very valuable. A depression is a recession with price deflation.

In other words. One dollar of purchasing power becomes $105 in purchasing power a year later. Cash is more valuable held than spent. Inflation makes cash less valuable spent than held.

So a 5% Treasury bond bought today, if the deflation started today and the deflation rate were 5%, assuming it were due in one year and paid its interest at the end. Would be worth $1102.50 for every $1000 dollars invested in terms of purchasing power.

Stocks, on the other side, would find that profits would fall since prices are falling. Further, the real interest rate would go up so it would be very expensive to borrow so growth would collapse.

Answer 2

In the past 3 major stock market crashes and during the great depression, investment-grade bonds went up in value. People seek the safety of investments that have a known interest payment from a reliable issuer.

However, "junk bonds", ones with a lower credit rating, will probably drop in price because the issuers won't be able to make the interest payments during an economic downturn.

Answer 3

Chances are the underlying businesses for those bonds are in a world of hurt. So it's a mixed bag.

Bonds are relatively safe in those situations vs. stocks, but alot of the So called "Junk bonds" will have serious problems.