Bond Market Investing Benefits

Aug 11, 2020 04:35 AM ET
Bond Market Investing Benefits

Often referred to as the credit market, debt market, or fixed-income market, the bond market is the collective name for each issue and trade-related to debt securities. In most cases, governments issue bonds to increase capitals for funding infrastructural improvements or clearing debts. Some publicly traded companies also issue bonds to maintain current operations or finance expansion projects. 

A Close Look at Bond Markets

Bond Experts divided into two separate silos: the secondary market and the primary market. Investors often refer to the primary market, where the new debt connects bond buyers and bond issuers. So, the primary market submits the development of new debt securities, which were not offered for the public.

In secondary bond markets, people buy securities sold in primary markets and sell them at other dates.  Investors can buy these bonds from brokers. They (the brokers) act as intermediaries between the selling and buying parties. Secondary market issues are also available as insurance policies, mutual funds, pension funds, and various other financial products. 

Bond Market Types

You can segment the traditional bond market into the following classifications

Emerging Market Bonds

Issued by companies and governments situated in thriving economies, emerging market bonds provide excellent growth opportunities. However, the risk is higher as well, especially when compared to developed or domestic bond markets.

Mortgage-Backed Bonds

Bond issues like these contain pooled mortgages on properties (real estate) and remain locked by the pledge of specific collateralized assets. Mortgage-backed bonds pay semi-annual, quarterly, or monthly interest.

Corporate Bonds

Companies issue these bonds to raise money for numerous reasons, including opening new production facilities, expanding their product lines, or financing their existing operations. It would be fair to think of corporate bonds as debt-instruments in the long run. They are an ideal option for individuals who seek maturity of one year or more.

Municipal Bonds

People also know this bond as the “muni bond.”  Government-owned entities like seaports, airports, school districts, public utility districts, special-purpose districts, cities, and states issue these bonds to raise money to fund different projects.

Government Bonds

Treasuries or nationally issued government bonds are quite enticing for buyers as they provide the face value written on the certificate on the agreed-upon date of maturity. Government bonds also issue regular interest payments to whoever chooses them. Conservative investors, in particular, find this bond to be highly beneficial. 

Bonds are critical for an investment portfolio. They are more relevant today than they were a decade or so ago. For several years, investors believed stocks were the most profitable financial product for saving in the long-term. Some would even argue that this sentiment exists today despite the multiple crashes in the stock market during the twenty-first century. Individuals who downplay the importance of bonds are missing out on highly profitable opportunities. 

Benefits of Investing in the Bond Market

Bonds are a Lucrative Source of Income

While almost every investment provides income, it would be fair to claim that bonds offer the most reliable and profitable cash streams. What's most impressive about investing in the bond market is that investors have numerous options, even the rates are low. Emerging market debt and high-yield bonds are excellent examples that showcase lucrative options for people looking to profit when the rates are not great.

Diversified bond portfolios provide sizeable yields with low volatility levels compared to equities. Their income is higher than that of bank instruments or money market funds, making bonds a favorable option for people who want to make the most of their investment income.

Bonds are perfect for Diversification

Almost every investor, especially experienced ones, know not to put all their eggs in one basket. Of course, it is a cliché, but there is a lot of wisdom behind it. Diversification is essential for investors to ensure they minimize risks and maximize returns. Furthermore, bonds can reduce volatility and help equity investors save capital for periods when the stock market is not performing well. 

Investors Can Get Tax Advantages

Some bond types can be perfect for people looking to minimize their burdens related to taxes. While incomes on money market funds (most of them), equities and bank instruments are taxable, there is tax-free interest for state-provided municipal bonds. 

What’s more, the income received from the United States treasuries is free from taxes on local and state levels. Of course, tax reasons should not be the main purpose for selecting an investment, particularly for investors dwelling in low tax brackets. Fixed incomes offer numerous vehicles that investors can take advantage of to reduce their tax issues.

Bond Preserves

Fixed income investments are excellent for investors nearing a point where using the money they invested is the only option. Stocks are inconsistent in the sense that they can randomly encounter massive volatility. The stock market crash during the early and mid-2000s is an ideal example of that. On the other hand, diversified bond portfolios are highly unlikely to suffer massive short term losses, making them a safer, more lucrative option. 

Due to this, most investors raise their allocation for fixed income and lower their equity allocations as they get closer to their targets. 

Investing in Bond Markets is More Reliable

If we take an example from history, stocks outperform bonds, especially in the long term. However, bonds are heads and shoulders better than stocks at some parts of the economic cycle. Furthermore, bonds can smoothen financial bumps during recessions, something that stocks cannot do. 

Investing in bond markets is also more predictable and secure. For instance, retirees mostly rely on the cash generated from bonds. Why? Because it is reliable. Owning bonds provides you a greater deal of certainty about the amount of income you could have after some years. It provides some investors with an excellent opportunity to recover their losses from times when equities were declining.

Final Thoughts

Bonds do not get adequate exposure in the financial media compared to stocks. However, they can serve a vast range of opportunities to various investors, helping them generate steady income in the long and short run. 

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