7 key factors you should know about bond investments

At the beginning of 2024, in January, it seemed that the bond investment craze was abating. In fact, the yield on the 10-year US bond (the market’s main benchmark) was slipping below 4% compared to the 5% it had been hovering around a few months earlier. However, as the days have gone by, this trend has subsided as the Federal Reserve is reluctant to lower interest rates.

The result is that the US bond remains relatively stable at 4.4%, which has once again boosted the debt market. After all, these levels not only guarantee a historically attractive yield (the highest since 2007), but are also higher than, for example, the current inflation rate in most Western countries, which is a further incentive for bond investors.

What are bonds?

A bond is a negotiable debt security issued by a public or private entity that seeks to raise funds in exchange for a commitment to repay the money within a certain period of time and with a previously known return. Bonds can be classified in many ways, although the most commonly used is as follows:

• Treasury bonds: issued by governments.
• Municipal bonds: those issued by regional public entities.
• Corporate bonds: issued by companies with a high rating (investment grade).
• Junk bonds: also issued by companies, but in their case they have a lower rating, i.e., speculative grade.

Why are bond investments interesting today?

As we have seen, the high profitability offered by debt, both public and private (which even exceeds it), means that investments in bonds continue to be in great demand.

The reason is that the price of money, which is set by central banks through interest rates, is not only at historically high levels, but they intend to maintain them at current or similar levels. In fact, both the Federal Reserve and the European Central Bank have decided to slow down their prospects of reducing the price of money, which has allowed yields to rise again and investors to continue betting on them.

What to consider when investing in bonds?

Beyond that good moment, bonds are one of the assets that investors value most to have in their portfolios, since they are safe and diversified products, with a known profitability and that generate recurring payments. In addition, because they are traded on the markets, they are also very liquid, i.e. you can get your money back if you want or need it.

So, to get the most out of these titles, pay attention to:

1. The maturity of the bonds: the term of the bonds in which you are going to invest is vital because until the security matures you will not recover your money. In addition, the longer the term, the greater the risk. Therefore, you must be clear about how long your investment in the bond will be immobilized.

2. Know the bond rating: the rating of a bond is an indication of its creditworthiness. Thus, the lower the rating, the higher the risk of default. To get an idea, the highest rating is AAA, while any bond below C is low quality or junk bond, according to Standard & Poor’s rating system.

3. Know the bond issuer: researching the background of the company, country, or region issuing the bond will be very useful when deciding whether to invest in their bonds or even to achieve greater diversification in your portfolio.

4. Understand your risk tolerance: Bonds with lower credit ratings often offer higher yields to compensate for higher levels of risk. Think carefully about your risk tolerance and avoid investing solely on the basis of yield.

5. Understand bonds: keep in mind that bonds are securities that are traded in the market and their value can fluctuate if you want to sell them before the term expires. To avoid surprises, you should know that when interest rates rise, bonds lose value and are worth less than what you paid for them. The opposite is also true, which, fortunately, is what is currently happening.

6. Diversification: bonds will help you diversify your investment portfolio. The fact is that the bond market is so large that it allows you to reduce the risk of possible falls in its value. In addition, its evolution is usually inverse to that of stocks, so it is also a perfect asset to balance your investments.

7. Check the information on commissions: when investing in bonds, always try to use a well-known platform with good recommendations and competitive costs. In this way, you ensure not only to get rid of certain problems, but also to improve your overall profitability. A good choice in this case are robo-advisors, which are automatic managers that offer the highest quality at reduced prices.

inbestMe: your best choice for investing in bonds

If you have taken note of the above points, you will come to the conclusion that not just any platform will do to invest in bonds, as it is a differentiating factor. In this case, we invite you to try inbestMe, a robo-advisor that contains a wide range of fixed income products with which you can grow your assets with a controlled risk.

In order to achieve this, inbestMe has two differentiating factors: firstly, its algorithm, calibrated down to the smallest detail, is capable of generating the best bond portfolios for any profile. Secondly, its team of experts, who are behind the system itself, are always on the lookout to re-evaluate and rebalance the portfolio so that profitability and risk always go hand in hand. So don’t wait any longer and jump into the bond market with inbestMe.