Bull Bond

What Is a Bull Bond?

A bull bond is a debt instrument with a price that is expected to increase in value if the stock market performs well.

Many believe there exists a negative correlation generally between stock and bond prices, so that when stocks go up bonds tend to go down, and vice versa. With a bull bond, however, this correlation is positive. Certain fixed-income securities are structured in such a way that makes them bull bonds.

Understanding Bull Bonds

A bull bond is a specific type of bond that outperforms other bonds that do well in a bull market. The most common type of bull bond is the principal-only strips (POS) mortgage-backed security. Whereas most bonds increase in value in a declining rate market, mortgage-backed securities perform exceptionally well. Bull bonds can diversify an investor's portfolio in a bull market.

A principal-only strip (POS) mortgage-backed security is a 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 be considered 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 (CDO), in addition to mortgage bonds.

Special Considerations

There is a fundamental inverse relationship between bond prices and their yield, which is tied to market interest rates. As a result, most bond prices tend to increase when interest rates decline. In a bull market, there are greater capital inflows into stocks that occur at the expense of fixed-income instruments.

This is because investors see a greater likelihood of generating superior returns in the stock markets. The lack of demand for bonds, usually, depresses their prices.

What Is 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.

Because psychological effects and speculation sometimes play a significant role in the markets, market trends are difficult to predict and 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% after a drop of 20% and before a 20% decline. The average bull market lasts nine years. It is the opposite, a bear market, which lasts for an average of 1.4 years.

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 stocks early to take advantage of rising prices and sell those stocks once when they’ve reached their peak.