Urban Wealth Management
The volatility of the stock market this year has many investors looking for alternative investment options. Given the drastic rise in interest rates throughout this year, bonds can be an attractive alternative to investors. Bonds are very different than stocks, and it’s important to understand more about them. That’s why we’ve put together a brief guide on some things to consider about bonds.
A bond is a form of debt issued by companies and governments alike. When purchasing a bond from a government or corporation, the bond is effectively lending money for a predetermined amount of time. The bond will have a specified date when the entity pays back all of the principal, plus interest (also known as the maturity date).
However, most of the time, the bonds are not directly issued from the entity. Instead, bonds are typically bought on a marketplace or exchange. When purchasing a bond on an exchange, its price will reflect the relative “riskiness” of the bond. This risk level is based on how likely the entity is to pay its debt back on time and in full.
Bonds issued by established entities, like the U.S. Government, or Apple, Inc. tend to have lower yields since they are extremely likely to make payments to their bondholders. Whereas bonds issued by companies or governments with shaky financials will have substantially higher yields, as they may not pay their bondholders.
In recent history, US 10-year treasuries, also known as T-Bills have returned around 2.5%, whereas triple-A-rated corporate bonds (the highest quality corporate bonds) returned somewhere in the neighborhood of 3.5%-4%. These bonds in particular are seen as a very safe way to achieve a small return on your investment. In most years, this is more than enough to stave off the effects of inflation.
Given the macroeconomic landscape the world was in, in 2021 bonds did not perform very well. Since bond returns are based on the cost of borrowing money, and interest rates were at the lowest levels we had seen in years, this led to very poor performance. However, toward the end of 2021, when financial markets began expecting interest rates to rise, bond yields began trending back up, which lead us to 2022.
Since interest rates have been rising astronomically quickly in 2022, so have bond yields. Now that bond yields are returning to normal levels, this has made them more attractive to investors. After all, many investors were making great returns in the stock market, when bond yields were at all-time lows. Now that the tides have turned, and it’s harder to generate a return in the stock market, people are flocking to bonds for a safer return on their investments.
Unfortunately, the answer to this question isn’t as cut and dry as you might hope. Everyone has a different level of risk they are willing to accept with their investments. That’s why it’s important to have an investment strategy that’s tailored to you, since your current situation and goals will dictate your investments.
Urban Wealth Management helps clients tailor investment strategies that work for them and their families. To schedule a complimentary 30-minute conversation today, give us a call at 424-277-2260 or visit our website today!