Analysis of fixed-income bonds as a current investment asset

You have probably heard of both fixed income bonds and the debt market interchangeably, as the two terms are synonymous. Although with a small technical nuance: bonds are a type of debt that has a fixed duration and coexist with other types of debt such as Treasury bills, shorter-term debt, and bonds, very long-term debt.

In short, fixed-income bonds are negotiable securities issued by an issuer, whether public or private, to raise funds in exchange for a commitment to repay the amount borrowed within a certain period of time and paying known interest rates. The key to these products is that they are one of investors’ favorite assets.

Why is the fixed income bond market so attractive?

The great attraction of fixed-income bonds lies in the fact that the investor knows at all times when the money will be returned to him and the return he will obtain for it. In fact, this is precisely their definition: negotiable securities issued by an issuer, which must later be repaid within a known period of time and with known interest. Hence, also the name of equities as its counterpart.

Today, the market has attracted investors strongly, thanks to the fact that this known yield has grown considerably. The reason is that interest rates are closely linked to the interest rates set by central banks, also known as the price of money, which is currently at a record high. This has led to fixed-income bonds occupying a very significant percentage of any investor’s investment portfolio.

How do fixed income bonds work?

Fixed income bonds work in a simple way: first, the securities are issued by a public company or agency. Secondly, interest payments are usually made in the form of fixed periodic coupons during the life of the bond. Finally, once the term has expired, the principal is repaid with the last interest coupon.

Although the above reflects the life of any bond, there are some peculiarities. The most important is that, as we have already mentioned, it is a negotiable security, which means that it is quoted in a market and its value varies. In this case, its value goes up or down depending on the profitability offered by the new bonds that are issued, so that if they offer more profitability the price of the old ones will go down and vice versa. This is why investors are currently so interested in fixed-income bonds, as interest rates should be falling soon.

The advantages of fixed income bonds

Beyond the good moment that fixed income bonds are experiencing, investors always include them in their bond portfolios because, in addition, they offer many other advantages such as:

• Inflation protection: by offering a known return, we can choose to acquire those with a return above inflation, which helps us to maintain our purchasing power.
• Provides an income stream: the return they offer is not only known, but comes to us on a recurring basis. That provides a breathing space for investors, as they can decide to reinvest that money or use it for other purposes.
• Diversification: the number of bonds is enormous, so a portfolio constructed with this type of asset can be enormously diversified in terms of maturities, geographies, and even risks. In addition, it also serves as a counterbalance to equities, because they are often indirectly related.
• Risk reduction: another advantage of fixed-income bonds is that they are generally very low-risk products, especially those issued by countries.

How to select fixed income bonds?

The many advantages of fixed-income bonds make them a must-have asset in any investment portfolio. However, choosing the ones that best suit one’s own portfolio is somewhat more difficult, as it will depend on a number of different factors. However, one maxim should always be followed: in any case, the bonds we incorporate must be aligned with our risk profile and the objectives we want to achieve. Based on that, the criteria to take into account are:

• The credit quality of the issuers: this is a key point, as it will determine the risk of our investment. Under normal conditions, it is always advisable to select those with a safe investment grade rating, as this ensures that our money is safe.
• The interest offered: as we know the interest of each bond, we can pick those that best suit our needs. However, bear in mind that the higher the yield, the higher the risk, so you must find a balance.
• The term to maturity: in this section, you should bear in mind that the longer the term, the higher the profitability (although not always).

Choosing fixed income bonds through inbestMe

If you have been convinced by all the benefits offered by fixed income bonds, the last step is to find a platform to help you invest in them. For this, a good option is the inbestMe platform, a robo-advisor that offers automated portfolios at very competitive prices and that not only has more than five years of life in Spain, but also accumulates different awards for its work.

As for the products it offers, inbestMe has two types of portfolios: a Conservative one, with which the most conservative investors will feel more at ease. Another, called Aggressive, incorporates assets with higher returns and more risk. Both choices, moreover, are then adjusted to the situation of each user and subsequently re-evaluated and balanced by the platform’s team of experts to offer the best possible result.