If you’re looking for where to invest your money, one of the few market consensus opinions is that now is a good time to invest in fixed income. The last time Spanish fixed income yielded as much as it does now, Spain was ‘slightly’ different: the public deficit exceeded 7.5% of GDP; there were 5.9 million unemployed people according to the EPA (Active Population Survey); the banking system had been recently rescued and still held 125 billion euros in toxic loans.
Despite everything, both Spanish and non-Spanish public debt continued to be part of investors’ portfolios. Even years later, it still occupied a notable percentage despite returns plummeting to negative levels. Therefore, now that the economy is growing strongly and returns are high, everyone agrees that it’s a good time to invest in fixed income, perhaps the best in many years.
What is fixed income?
Fixed income refers to the market where debt issuances by states, public bodies, and companies are traded to finance themselves with a commitment to repay those funds within a certain period and with stipulated interest rates. The variety of products in this market is enormous and includes many classifications, ranging from the issuer (public or corporate debt) to the term (notes or bonds) and even the purpose of the funds (green bonds).
How does fixed income work?
The mechanism of fixed income is relatively simple: first, an issuer releases a debt security, usually called a bond, which comes with a repayment term and interest. This security gives its holder the right to receive interest payments, known as coupons, and, once the term is over, to receive the remaining principal. Finally, keep in mind that these bonds can be purchased directly from the issuer (primary market) or from a current holder (secondary market), and the price in the latter case fluctuates depending on various factors.
Is it a good time to invest in fixed income?
As noted earlier, it is currently a good time to invest in fixed income. In fact, it has been for years, although it might be even better now due to:
- Current economic stability: Fixed income is tied to the economic conditions of the moment, as agents must assess the issuer’s ability to repay the principal and pay interest. Currently, the situation seems ideal, at least from the perspective of public debt, as the economy is growing vigorously (2.5% in 2023), the labor market has a record number of contributors, and the public deficit has significantly decreased. This is why there is a consensus that it is a good time to invest in fixed income.
- Favorable interest rates: Interest rates greatly influence the returns offered by fixed income (although risk premiums should also be added). Since rates are currently near their peaks, returns are high as well. Additionally, another key point is that rates are expected to decrease, which means current debt securities will increase in value. This also reinforces the idea that it is a good time to invest in fixed income.
- Safety: Fixed income is a secure product that generates stable cash flows through coupon payments. Currently, with high returns, the cash flow generated in your account is also substantial, allowing you to manage unforeseen expenses or combat current inflation.
Other characteristics of fixed income
- Capital protection: Regardless of whether it is a good time to invest in fixed income or not, the difference from other investments, like equities, is that it allows you to protect your capital. After all, debt issuers are usually solvent countries or companies that meet their obligations.
- Risk diversification: Another advantage of fixed income is that it allows for greater diversification than other investment products. For example, within Spanish public debt, there are numerous bonds or notes with different returns or terms, allowing for diversification. In contrast, a company’s shares are typically the same. Additionally, fixed income complements equities, as they often move in opposite directions.
- Predictability of returns: Whether the return is small or high, the advantage of fixed income is that you always know it, making it easier to adjust your portfolio. This does not happen with equities, where you cannot predict the return or even if you will recover your money. Thus, in part, it is always a good time to invest in fixed income.
Invest in fixed income easily with inbestMe
If you are convinced that now is a good time to invest in fixed income, you should know that there are many financial firms, banks, or platforms to enter the fixed income investment market. We suggest using inbestMe, a financial platform with extensive experience in Spain that has helped many investors grow their money.
Among the advantages of choosing inbestMe are its tools designed for all investors and personalized advice to adjust the firm’s algorithms and assist users. Additionally, it provides a series of bond portfolios differentiated by profiles for investing in fixed income with reduced commissions. Therefore, if you are interested in investing in public debt, the best option is to visit inbestMe and get more information on how to optimize your investments and grow your savings.
