An Overview of Bond Investing

​In a July 2024 MSN article, experts explain why 2024 became the year to invest in bonds. Most bonds do not generate significant returns, making them an underappreciated investment vehicle. However, bonds offer investors a place to invest capital in an interest-bearing, stable financial vehicle.

The rise in bond interest in 2024 began before the pandemic when investors shifted their capital among different high-yielding savings accounts to achieve a 1 percent return on their investment. At the time, bonds yielded very little interest, so stocks became the only viable investment alternative for those seeking high returns. By 2024, inflation and the federal government’s actions to curb it through rate hikes created an environment where bonds became more attractive, as agencies issuing new bonds offered higher rates to compete with existing ones.

Bonds still have a place in any portfolio. Bonds serve as loans that investors, corporations, and government agencies issue for the public to invest in. These groups use the funding to support specific projects, ventures, or programs. Thus, investors benefit from purchasing bonds through the interest that the bond issuer pays them at regular intervals throughout the term (life) of the bond.

An investor can purchase a bond for as little as $100, with some backed by mortgage contracts, buildings, equipment, and other tangible assets. Bond purchasers can also buy and sell bonds in the same way as stocks and other securities, but they become vulnerable to fluctuations in prices, which can result in selling at a high or low price. Finally, the longer the bond’s maturity term, the more likely it is to fluctuate in price, which exposes this investment vehicle to certain risks.

Compared with other securities, bonds remain a conservative investment vehicle and carry lower risk. Nonetheless, investors face the risk of experiencing a price drop, and the bond could sell for less than its original purchase price. Furthermore, inflation can cause fixed-interest bonds to lose value because their interest payments do not maintain the same purchasing power. Sometimes, the bond issuer cannot make interest payments or fulfill the bond’s value at the end of its term.

Compared to high-yielding investment vehicles, bonds exhibit lower volatility. The low volatility means that they will not yield as much in return as stocks, equities, and other investments. However, bonds help diversify portfolios, balancing them and reducing risk. In a portfolio, bonds often move in the opposite direction of stocks, providing a buffer against volatility.

Moreover, bonds offer a fixed stream of income. For example, retirees find that bond interest payments offer a reliable source of income. High-income investors in municipal bonds benefit from their federal tax exemption. In some cases, they also do not incur state and local taxes. When compared with CDs, savings accounts, and money market funds, bonds are more attractive.

In certain instances, bonds outperform cash equivalents. Cash equivalents are highly liquid investment vehicles that investors can easily convert to cash, such as CDs, bankers’ acceptances, corporate commercial paper, and money market instruments. They also have short maturity times and are low risk. In comparison with cash equivalents, bonds have historically outperformed them. Over the 95 years spanning 1928 and 2023, bonds delivered returns 1.3 percent higher than those of cash.

Gary Begnaud

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