We already suggested last month: it might be a good time to consider bonds as a solid investment.
We still like to invest in so called dividend aristocrats stocks, if it comes to long-term, income producing investments but starting to buy some bonds could be a good addition to your overall portfolio. Here’s why this move makes a lot of sense:
Attractive Yields: U.S. Treasuries are currently offering yields not seen since 2007. Investment-grade corporate bonds with strong S&P Global ratings (BBB- or higher) are boasting an average yield of 6.3%, the highest in nearly 15 years. Even non-investment-grade, or junk bonds, are providing an average yield of 9%, offering a more conservative option compared to stocks.
Predictable Returns: The key distinction between stocks and bonds lies in their nature. A stock’s value is subject to market dynamics and can fluctuate significantly. In contrast, a bond has a fixed value at maturity, regardless of its market price during its term. This predictability is a reassuring factor.
Risk Management: The bond market offers a unique advantage in that even if the bond’s price drops during your ownership, it won’t affect the final pay out. On the maturity date, you will receive the promised fixed value, barring a rare scenario where the issuing company goes bankrupt. Along the way, you’ll also receive interest payments.
Market Volatility: The stock market has been tumultuous for the past two years, with only a handful of Big Tech stocks driving positive gains. A significant portion of stocks has seen declines, with no immediate signs of stabilization in sight. Given the current environment, it’s crucial to ask whether it’s worth risking your capital in stocks, which typically offer returns of 8% to 10% per year but come with higher volatility.
Short-Term Safety: If you have funds earmarked for shorter-term needs, investing in bonds now could be a wise choice. With yields exceeding 5% in Treasuries, more than 6% in safe corporate bonds, and even 9% in more speculative bonds, you can enjoy attractive returns while having the assurance of getting your initial investment back.
In conclusion, bonds are currently providing a good opportunity for investors to secure their capital and generate stable income. While long-term investments in stocks are favoured, allocating short-term funds to bonds seems like a prudent strategy in today’s uncertain market.
Sven Franssen