WHAT IS 'Bull Bond'

A bull bond is a term used to refer to a bond that is likely to increase in value in a bull market. Most bonds tend to increase in value when interest rates decline, but bull bonds refer to types of bonds that do especially well in this environment. A bull bond is a specific type of bond that performs well in a bull market. The bull bond increases as interest rates decline, which distinguishes it from many other types of bonds, most of which tend to increase in price when interest rates are rising.

BREAKING DOWN 'Bull Bond'

The most common example of a bull bond is the principal-only strips (PO) mortgage-backed security. Whereas most bonds will increase in value in a declining rate market, mortgage-backed securities perform exceptionally well.

A principal-only strip mortgage-backed security is fixed-income security where the holder receives the non-interest portion of the monthly payments on the underlying loan pool of mortgage securities. POS mortgage securities do well in a declining rate market because mortgage holders refinance their loans at lower interest rates. Investors are then repaid their original investment more quickly, increasing the rate of return for the mortgage-backed security.

Though many bull bonds tend to be mortgage-backed bonds, there are other kinds of bonds that perform well during a bull market and could also carry the definition of bull bonds.  The general bond market can be classified into corporate bonds, government and agency bonds, municipal bonds, asset-backed bonds, and collateralized debt obligations, in addition to mortgage-backed bonds.

What Makes 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 apply to anything traded, such as bonds, currencies, and commodities.

Since market trends are difficult to predict, as psychological effects and speculation sometimes play a significant role in the markets, bull markets are typically only recognized once they’ve happened. One commonly accepted definition of a bull market is when stock prices rise by 20 percent after a drop of 20 percent and before a 20 percent decline.

A strong or strengthening economy, low unemployment, and a rise in corporate profits are characteristics of a bull market. In a bull market, investors are more willing to take part in the stock market to gain profits. Investors who want to benefit from a bull market should buy early to take advantage of rising prices and sell them when they’ve reached their peak.

The average bull market lasts nine years. It is the opposite, a bear market, which lasts for an average of 1.4 years.

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