When to buy and sell bonds
Why does selling a bond drive up the yield? The bond will pay back a fixed amount when it comes due. The yield is a comparison of what you pay for the bond and what will be repaid when it matures (assuming no default). Why does the yield go up if the country is economically unstable? If the country's economy is unstable, that increases the chance that they will default and not pay the full value of the bonds when they mature. People are selling them now at a loss instead of waiting for a default later for a greater loss. So if you think Greece is not going to default as it's highly likely a country would completely default, wouldn't it make sense to hold onto the bonds? Only if you also think that they will pay back the full value at maturity. It's possible that they pay some, but not all. It's also possible that they will default. It's also possible that they will get kicked out of the Euro and start printing Drachmas again, and try to pay the bonds back with those which could devalue the bonds through inflation. The market is made of lots of smart people. If they think there are reasons to worry, there probably are. That doesn't mean they can predict the future, it just means that they are pricing the risk with good information. If you are smarter than the herd, by all means, bet against them and buy the bonds now. It can indeed be lucrative if you are right, and they are wrong. "Why does the yield go up if the country is economically unstable? The yield will rise when instability increases because the risk of default increases.  If the case of Greece, the instability of government finances resulted in a 50% ""haircut"" for bond holders in 2011.  In other words, bond holders suffered a 50% write down in the nominal value of their bonds.  This means that holding these bonds until maturity will mean they will only receive half of the original nominal value of the bond, and that is assuming no further write downs occur. Why does selling a bond drive up the yield? Significant selling of bonds means that sellers are worried about future prospects.  Sellers will outnumber buyers, so sellers will have to reduce their offer price in order to attract new buyers. So if you think Greece is not going to default as it's highly likely a country would completely default, wouldn't it make sense to hold onto the bonds? If you think that it is highly unlikely that Greece will default and the prices and yields are attractive, then Greek bonds may look like an attractive investment. However, keep in mind the fate of bond holders in 2011.  They were attracted to Greek bonds by the price and yield, but they suffered a 50% haircut."
"At the most fundamental level, every market is comprised of buyers and selling trading securities. These buyers and sellers decide what and how to trade based on the probability of future events, as they see it. That's a simple statement, but an example demonstrates how complicated it can be. Picture a company that's about to announce earnings. Some investors/traders (from here on, ""agents"") will have purchased the company's stock a while ago, with the expectation that the company will have strong earnings and grow going forward. Other agents will have sold the stock short, bought put options, etc. with the expectation that the company won't do as well in the future. Still others may be unsure about the future of the company, but still expecting a lot of volatility around the earnings announcement, so they'll have bought/sold the stock, options, futures, etc. to take advantage of that volatility.  All of these various predictions, expectations, etc. factor into what agents are bidding and asking for the stock, its associated derivatives, and other securities, which in turn determines its price (along with overall economic factors, like the sector's performance, interest rates, etc.) It can be very difficult to determine exactly how markets are factoring in information about an event, though. Take the example in your question. The article states that if market expectations of higher interest rates tightened credit conditions... In this case, lenders could expect higher interest rates in the future, so they may be less willing to lend money now because they expect to earn a higher interest rate in the future. You could also see this reflected in bond prices, because since interest rates are inversely related to bond prices, higher interest rates could decrease the value of bond portfolios. This could lead agents to sell bonds now in order to lock in their profits, while other agents could wait to buy bonds because they expect to be able to purchase bonds with a higher rate in the future.  Furthermore, higher interest rates make taking out loans more expensive for individuals and businesses. This potential decline in investment could lead to decreased revenue/profits for businesses, which could in turn cause declines in the stock market. Agents expecting these declines could sell now in order to lock in their profits, buy derivatives to hedge against or ride out possible declines, etc. However, the current low interest rate environment makes it cheaper for businesses to obtain loans, which can in turn drive investment and lead to increases in the stock market. This is one criticism of the easy money/quantitative easing policies of the US Federal Reserve, i.e. the low interest rates are driving a bubble in the stock market. One quick example of how tricky this can be. The usual assumption is that positive economic news, e.g. low unemployment numbers, strong business/residential investment, etc. will lead to price increases in the stock market as more agents see growth in the future and buy accordingly. However, in the US, positive economic news has recently led to declines in the market because agents are worried that positive news will lead the Federal Reserve to taper/stop quantitative easing sooner rather than later, thus ending the low interest rate environment and possibly tampering growth.  Summary: In short, markets incorporate information about an event because the buyers and sellers trade securities based on the likelihood of that event, its possible effects, and the behavior of other buyers and sellers as they react to the same information. Information may lead agents to buy and sell in multiple markets, e.g. equity and fixed-income, different types of derivatives, etc. which can in turn affect prices and yields throughout numerous markets." I let someone else pick and chose which junk bonds to buy and which to sell. So instead of holding individual bonds in my portfolio I hold an ETF that is managed by a man with a PHD and which buys junk bonds.   I get a yearly 15.5% ROI, paid monthly.  Buy and hold and you can get a good return for the rest of your life. It is only speculation when you sell. "The most fundamental observation of bond pricing is this: Bond price is inversely proportional to bond yields  When bond yields rise, the price of the bond falls.  When bond yields fall, the price of the bond rises.  Higher rates are ""bad"" for bonds. If a selloff occurs in the Russian government bond space (i.e. prices are going down), the yield on that bond is going to increase as a consequence." "You are asking multiple questions here, pieces of which may have been addressed in other questions.  A bond (I'm using US Government bonds in this example, and making the 'zero risk of default' assumption) will be priced based on today's interest rate. This is true whether it's a 10% bond with 10 years left (say rates were 10% on the 30 yr bond 20 years ago) a 2% bond with 10 years, or a new 3% 10 year bond.  The rate I use above is the 'coupon' rate, i.e. the amount the bond will pay each year in interest. What's the same for each bond is called the ""Yield to Maturity."" The price adjusts, by the market, so the return over the next ten years is the same.  A bond fund simply contains a mix of bonds, but in aggregate, has a yield as well as a duration, the time-and-interest-weighted maturity.  When rates rise, the bond fund will drop in value based on this factor (duration). Does this begin to answer your question?" "If I don't need this money for decades, meaning I can ride out periodical market crashes, why would I invest in bonds instead of funds that track broad stock market indexes? You wouldn't.  But you can never be 100% sure that you really won't need the money for decades.  Also, even if you don't need it for decades, you can never be 100% certain that the market will not be way down at the time, decades in the future, when you do need the money.  The amount of your portfolio you allocate to bonds (relative to stocks) can be seen as a measure of your desire to guard against that uncertainty. I don't think it's accurate to say that ""the general consensus is that your portfolio should at least be 25% in bonds"".  For a young investor with high risk tolerance, many would recommend less than that.  For instance, this page from T. Rowe Price suggests no more than 10% bonds for those in their 20s or 30s. Basically you would put money into bonds rather than stocks to reduce the volatility of your portfolio.  If you care only about maximizing return and don't care about volatility, then you don't have to invest in bonds.  But you probably actually do care about volatility, even if you don't think you do.  You might not care enough to put 25% in bonds, but you might care enough to put 10% in bonds." "Investment strategies abound. Bonds can be part of useful passive investment strategy but more active investors may develop a good number of reasons why buying and selling bonds on the short term. A few examples: Also, note that there is no guarantee in bonds as you imply by likening it to a ""guaranteed stock dividend"". Bond issuers can default, causing bond investors to lose part of all of their original investment. As such, if one believes the bond issuer may suffer financial distress, it would be ideal to sell-off the investment." I am understanding the OP to mean that this is for an emergency fund savings account meant to cover 3 to 6 months of living expenses, not a 3-6 month investment horizon. Assuming this is the case, I would recommend keeping these funds in a Money Market account and not in an investment-grade bond fund for three reasons: "All of the other answers here are accurate, but (I think) are missing the point as to the question, which rests on how Bonds work in the first place. The bond specifies a payback AMOUNT and DATE. Let's say it is $10,000 and one year from today. If you buy that today for $9900, your yield will be 1%. If you buy it today for $11,000, your yield will be less than 0% (please don't make me do the math - it's just under negative 1%). You might be willing to pay that 1% (rather than receive 1%) for the certainty that you will definitely get your money back. The combined actions of all the people who may be willing to pay a little more or a little less for the safety of a US Treasury Bond is what people call ""the Market.""  Market forces (generally, investor confidence) will drive the price up and down, which affects the yield. All the other stuff - coupons and inflation and whatnot - all of that only makes sense if you understand that you aren't buying a rate of return, you are buying a payback amount and date." What you said is technically correct. But the implication OP might get from that statement is wrong. If the Fed buys bonds and nominal yields go down (Sometimes they might even go up if it meant the market expected the Fed's actions to cause more inflation), inflation expectations don't go down unless real yields as measured by TIPs stay still. Short-term to intermediate-term corporate bond funds are available. The bond fund vehicle helps manage the credit risk, while the short terms help manage inflation and interest rate risk. Corporate bond funds will have fewer Treasuries bonds than a general-purpose short-term bond fund: it sounds like you're interested in things further out along the risk curve than a 0.48% return on a 5-year bond, and thus don't care for the Treasuries. Corporate bonds are generally safer than stocks because, in bankruptcy, all your bondholders have to be paid in full before any equity-holders get a penny. Stocks are much more volatile, since they're essentially worth the value of their profits after paying all their debt, taxes, and other expenses.  As far as stocks are concerned, they're not very good for the short term at all. One of the stabler stock funds would be something like the Vanguard Equity Income Fund, and it cautions: This fund is designed to provide investors with an above-average level   of current income while offering exposure to the stock market. Since   the fund typically invests in companies that are dedicated to   consistently paying dividends, it may have a higher yield than other   Vanguard stock mutual funds. The fund’s emphasis on slower-growing,   higher-yielding companies can also mean that its total return may not   be as strong in a significant bull market. This income-focused fund   may be appropriate for investors who have a long-term investment goal   and a tolerance for stock market volatility. Even the large-cap stable companies can have their value fall dramatically in the short term. Look at its price chart; 2008 was brutal. Avoid stocks if you need to spend your money within a couple of years. Whatever you choose, read the prospectus to understand the risks. "Bonds are priced ""very high"" because their price is compared to their yields. With the current interest rates, which are very low, the bond yields will be low. However, bond issuers still need the money, so there still will be high par value, and investors will not sell bonds at a loss unless there's a better investment (=bonds with better yields). Once the rates start going up, you'll see bonds with current rates dropping in value significantly. Once alternatives appear, people holding them will start dumping them to move the money somewhere more profitable. Similarly the stocks - since there's no other investment alternatives (yields on the bonds are low, interests are low), people invest more in the stocks. Once the rates go up, the investors will start rebalancing portfolios and cashing out." Yes, if you want income and are willing to commit to hold a bond to maturity, you can hold the bond, get the scheduled payments, and get your principal returned at the end. US Savings Bonds are non-marketable (you cannot trade them, but can redeem early) bonds designed for this purpose. The value of a marketable bond will vary over its lifetime as interest rates change and the bond matures. If you buy a 30 year US Treasury bond at par value (100) on September 1, 2011, it yielded 3.51%. If rates fall, the value of your bond will increase over 100. If rates rise, the value will decrease below 100.  How much the value changes depends on the type of bond and the demand for it. But if your goal is to buy and hold, you don't need to worry about it. If it had immediate purchase power of $525, can I use that to buy more $500 bonds over and over again?  Your idea is flawed. You can't just make money out of thin air, unless you are running a Ponzi scheme. "'Buy and Hold' Is Still a Winner: An investor who used index funds and stayed the course could have earned satisfactory returns even during the first decade of the 21st century. by By Burton G. Malkiel in The Wall Street Journal on November 18, 2010: ""The other useful technique is ""rebalancing,"" keeping the portfolio asset allocation consistent with the investor's risk tolerance. For example, suppose an investor was most comfortable choosing an initial allocation of 60% equities, 40% bonds. As stock and bond prices change, these proportions will change as well. Rebalancing involves selling some of the asset class whose share is above the desired allocation and putting the money into the other asset class. From 1996 through 1999, annually rebalancing such a portfolio improved its return by 1 and 1/3 percentage points per year versus a strategy of making no changes."" Mr. Malkiel is a professor of economics at Princeton University. This op-ed was adapted from the upcoming 10th edition of his book ""A Random Walk Down Wall Street,"" out in December by W.W. Norton. http://online.wsj.com/article/SB10001424052748703848204575608623469465624.html" Keep in mind that the bond market is dominated by US Treasury securities... if there were an S&P 500 for bonds, the US would take positions 1-400. Be careful that you understand what's in your bond funds -- you may not be as diversified as you think.