Investment Strategy In Government Bonds

It is hard to say how much investing in government bonds will help your pension portfolio, but there are some unique benefits for those willing to take their time. Those who invest in individual bonds can often choose between 1 – 2 bond funds or buying in a broker account. If this seems too complex to broaden your investment portfolio, or if you don’t want to use a financial adviser as a guide, there are two other ways to add fixed-income instruments to your investment. Buying bonds in the form of a government bond fund or private equity fund can be a headache, and consulting a qualified asset manager can help you choose the best approach to take now. [Sources: 7, 8, 9, 18]

Like shares, government bonds can be held and sold to other traders on the market. Investors can also buy government bonds on the secondary market from banks and brokers who buy them directly from the government or from a bank or broker in exchange for government bonds. [Sources: 10, 13]

If you need short-term investment grade bonds, you can buy ETFs in the same way as government bonds. You can reduce your risk by combining a government bond portfolio with a portfolio of other high-quality bonds, such as equities or bonds from other countries. [Sources: 7, 17]

If your main strategic objective when taking out bonds is diversification, you can choose an active or passive bond selection strategy. Investors seeking capital preservation and income diversification can simply buy bonds and hold them until maturity. This approach has the potential to lead to long-term investment in government bonds and other high-quality bonds. [Sources: 12, 16]

Since bonds with longer maturities typically have higher interest rates, this strategy involves investing in long-term bonds. Treasury bonds carry the risk that interest rates will rise over time, reducing the value of the bond. [Sources: 1, 11]

For example, if you want to buy a home in 15 years, you can schedule your Treasury bond investments to match the time you expect to need the money. If you choose to capitalize on higher returns by investing more in government bonds, your position as a Treasury bond could be diminished in the future when yields return to normal. This strategy could be considered first for conservative investors – investors who are unsure how to invest but want a predictable plan for working until retirement age. [Sources: 9, 10]

Investors looking for the traditional benefits of bonds can also choose a passive investing strategy that seeks to match the performance of bond indices. This includes buying and holding bonds until maturity or investing in bond funds or portfolios that track bond indices. Diversification is key – if you are only interested in Treasury bonds, you should diversify as much as possible to stay fully invested. An iShares Treasury Bond ETF (ETF) can help investors maintain their exposure to the Treasury bond market. [Sources: 2, 8, 16]

While a passive strategy involves investing in selected bonds, an active strategy requires an individual bond selection to track the performance of the index. [Sources: 12]

Investors looking for a safe investment with high returns would need a minimum investment of £1,000 in return for flexibility. Corporate bonds can be bought on the Retail Bond Platform on the London Stock Exchange. You don’t have to access your money until the bond matures, and the fund is within the FDIC’s $250,000 limit. [Sources: 3, 15]

They can buy Treasury bonds managed by the Federal Reserve Bank of New York, the US Treasury or the Treasury Department of the Secretary of State. [Sources: 1]

For most retail investors, the best way to invest in these bonds is to buy TreasuryDirect bonds or ETF bond funds. While you can buy government bonds directly from the US government, most bonds must be purchased through the Federal Reserve Bank of New York or the Secretary of State’s Treasury. Because government bonds are better valued and represent a safer and safer investment, traders who prefer riskier investment strategies may prefer high-yield bonds to government bonds. Investors who want to diversify their bond holdings may need to take a little more risk to get involved, but forget higher returns. [Sources: 0, 4, 6, 15]

This type of bond is well suited – for purchases – and – holding strategies, because it minimizes the risk associated with embedded options that are included in the bond issue contract and remain with the bonds for life. [Sources: 14]

Buying government bonds typically carries little or no default risk, but when the bond is traded on the open market, it can lose value when interest rates rise above the face value of the bonds. When buying individual bonds, investors want to manage their interest rate risk by diversifying the maturities of their bonds. This strategy involves an investor buying longer-dated bonds rather than medium-term bonds, a financial asset invested in long-term government bonds that are limited by the government’s bond issue contract and its maturity date. We begin by looking at two types of government bonds: sovereign debt and sovereign equity. [Sources: 3, 5, 7, 18]

Sources:

(0): https://www.cmcmarkets.com/en-gb/trading-guides/invest-in-bonds

(1): https://www.fool.com/investing/how-to-invest/bonds/treasury-bonds.aspx

(2): https://www.blackrockblog.com/2020/06/02/trending-now-treasury-etfs/

(3): https://www.asktraders.com/learn-to-trade/stock-trading/how-to-buy-government-bonds/

(4): https://www.wellsfargo.com/goals-investing/investing-types/bonds/

(5): https://buckinghamadvisor.com/you-can-be-too-conservative-051313/

(6): https://investinganswers.com/articles/bonds-101-how-navigate-complex-world-bonds

(7): https://www.bankrate.com/investing/how-to-invest-in-bonds/

(8): https://www.fidelity.com/learning-center/investment-products/fixed-income-bonds/bond-investment-strategies

(9): https://www.sdmayer.com/insights/blogs/wealth-management/is-investing-in-government-bonds-a-smart-move-sdm/

(10): https://www.acorns.com/money-basics/investing/long-term-treasury-bonds/

(11): https://www.wiseradvisor.com/article/bond-strategies-for-various-financial-goals-235/

(12): https://saylordotorg.github.io/text_personal-finance/s20-03-bond-strategies.html

(13): https://tendercapital.com/en/what-is-the-difference-between-government-bonds-and-corporate-bonds/

(14): https://www.investopedia.com/articles/bonds/08/bond-portfolio-strategies.asp

(15): https://www.realwealthnetwork.com/learn/safe-investments-with-high-returns/

(16): https://www.pimco.com/en-us/resources/education/everything-you-need-to-know-about-bonds

(17): http://www.dvzcpa.com/investment-strategies.php?item=83&catid=28&cat=Investment%20Basics:%20What%20You%20Should%20Know

(18): https://www.forbes.com/advisor/investing/how-to-buy-bonds/

How retirees should be reacting to higher rates

I owe this insight to Cliff Asness, founder of AQR Capital Management, who says that this misconception about bonds is one of his top 10 pet peeves.

Retirees should be celebrating higher interest rates.

That’s because retirees have suffered mightily over the last decade from the Federal Reserve’s low-interest rate policy. Most of their portfolios are heavily allocated to fixed-income investments, and they have had to live on the pittance they’ve been earning in interest. They should be able to earn more going forward.

Nevertheless, many retirees are not in a celebratory mood. Their reaction betrays a fundamental misunderstanding about investing in bonds.

The retirees’ gloomy reaction stems from the losses their bond holdings have suffered as interest rates have risen in recent months to their current level—the highest in seven years, as judged by the 10-year Treasury yield TNX, -0.61% Less than two years ago, in July 2016, the 10-year yield was below 1.4%; today it is more than twice as high, above 3.0%.

Many retirees feel that they have no choice but to hold their bonds until maturity in order to make back the paper losses they’re now sitting on.

This is false comfort.

It is true that on the assumption of no default risk, a retiree is assured of getting back 100 cents on the dollar if he holds his bonds until they mature. But there’s nothing magical about this result. You would make just as much money by selling your bonds now, realizing your losses, and investing the proceeds in another bond of similar quality and maturity and holding until the date of your original bond’s maturity.

I owe this insight to Cliff Asness, founder of AQR Capital Management, who says that this misconception about bonds is one of his top 10 pet peeves. He adds:

“The option to hold a bond to maturity and ‘get your money back’… is, apparently, greatly valued by many but is in reality valueless. The day interest rates go up, individual bonds fall in value… By holding the bonds to maturity, you will indeed get your principal back, but in an environment with higher interest rates and inflation, those same nominal dollars will be worth less. The excitement about getting your nominal dollars back eludes me.” (This quotation is from an article Asness wrote for the Financial Analysts Journal in 2014.)

In other words, the paper losses your bond holdings have incurred as rates have risen is water under the bridge. Your focus now should be on the future.

Think about it this way: Interest rates would have had to stay at rock bottom levels in order for the bond portion of your portfolio to maintain the value it had in July 2016, when the 10-year yield was less than half its current level. You can’t expect your bond portfolio to maintain that value and, at the same time, start paying a higher effective interest rate. You can have one or the other, but not both.

To put this in yet other terms: On the one hand your bond portfolio could have a higher net worth and earn very little in interest, or on the other hand you could have a bond portfolio that’s worth less but which earns a greater interest rate. Take your pick.

The retirees who are in a bad mood because of rising interest rates appear to be favoring the first of these two scenarios. But not only would that scenario lock them into a world of perpetually low interest earnings, the second — what we have currently — has a significant ancillary benefit: With higher interest rates, you are able to lock in a greater level of guaranteed income when you shift assets away from equities into fixed income. Up until now, of course, there had been little incentive for retirees to even consider that possibility.

Netting the plusses and the minuses, therefore, retirees should be welcoming the return of higher interest rates.

So don’t worry — be happy!

For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.