Bonds – Are They a Solid Option during the Coronavirus Pandemic?Submitted by Constellation Financial Advisors on May 6th, 2020
May 6, 2020
There’s something in the air right now and I’m sure you can sense it, too. As the coronavirus pandemic worldwide carries on, more and more investors are catching a bug that makes them think that selling off their stock portfolio and moving their assets to greener pastures would be wise at this time. There may be some truth to that idea, so long as those greener pastures are found within the bond market.
Even some seasoned investors aren’t familiar with the bond market. If you count yourself among that crowd, then consider the following before making your next big move in this new bear market:
What is a Bond?
First and foremost, you need to understand what a “bond” is. In essence, these are IOUs issued by the US Treasury that allow the issuer (which could be the federal, state, or local government) to obtain capital efficiently. In return, the issuer promises to pay interest on the bond over its lifespan until it reaches maturity, at which time the principle is repaid in full.
While this sounds simple enough, there’s more that goes into the bond market. For example, there are only ever so many bonds of one kind or another issued. This creates a supply and demand, which in turn causes the actual cost of a bond to increase beyond its principle value. Greater demand in this market (as is being seen right now) also drives down per-bond yields, meaning that each pay out a smaller fraction of their value as interest.
Are Bonds a Good Investment Right Now?
This is the question on many seasoned investors’ minds. The answer, at least at this juncture, appears to be…yes! In part, this is because individual bonds do not lose value in terms of earned interest once they are purchased by a new investor. At that time, a bond’s interest rate locks in, preventing future market instability from undercutting their value.
Also, bond prices are currently set to become more and more valuable over time, even if the economy as a whole is slow to rebound. This is because the Federal Reserve has cut interest rates several times lately, which in turn has caused yield rates on new bonds to fall. Over time, this has allowed existing bonds to rise in value due to their higher-than-average yield rates.
The inherent insurance on a bond investment is noteworthy in a time of instability, too. After all, US Treasury bonds are backed by the full faith and credit of the US government. They are not likely to ever default on their interest payments, so you can count on this kind of investment for 10 to 20 years or more without worry.
Don’t Go Overboard
Everything – from your favorite sweets to a popular investment option – is better in moderation. This is true even for bonds, which should not be purchased in excess even during these volatile times. Doing so would break one of the core tenants of modern investing, which calls for a diverse portfolio for all seasons. Too many bonds, after all, will cause your assets to be stuck in a stable form of investment when the stock market rebounds in the immediate future.
The Bottom Line
In short, you may find bond-based investment to be worth your time and effort during this incoming recession. Because they are so stable and reliable, many have already begun to turn to the bond market to provide them a reliable incoming while the stock market drops to new lows.
You could be the next to give bonds a try. Talk to your broker today to see what bond options are available to you today.
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