Bonds are often seen as a complex asset class, but that doesn’t mean they’re of no interest to investors. On the contrary, depending on the investor’s objectives, they can offer many opportunities. “A bond can be issued by a company or a country. By investing in a plain vanilla bond, an investor is in fact agreeing to lend money to that company or country on the understanding that they’ll get back what they invested at a set date in the future, as well as receiving fixed coupons in the meantime – unless, of course, the issuer defaults,” explains Flavio Carpenzano, an investment director at Capital Group.
Investing in bonds is very different from investing in equities: pretty much everything – the term of the investment, the yield, and the amount of income generated and paid out in the form of a coupon – is set in advance. With an equity investment, on the other hand, whether or not a dividend will be paid depends on the company’s results, and the investment period is open-ended. “Today’s bond market is huge, offering a vast array of possibilities,” continues Carpenzano. “There are many different types of bonds, with a huge choice of issuers, maturities, yields and coupons. Different bonds also meet different needs for issuers themselves.”
Strength in diversity
So why invest in bonds? There are a number of reasons. “Bond investing is often at the heart of a strategy for diversifying and protecting an investment portfolio,” says Carpenzano. “In an inflationary environment like we have now, bonds can potentially help protect a portfolio’s value while creating a regular fixed income stream. Bonds can also serve to anchor a portfolio. Whenever financial markets have gone through crises, bonds have historically tended to outperform equities, thus helping protect capital.”
Steady income stream
In today’s world, investors are interested in bonds of all kinds, including government bonds with negative yields. “Bonds are always in demand. As part of a longer-term strategy, even though the bond market can be somewhat volatile, bonds are a fairly safe investment compared to equities. As we said, there are plenty of other opportunities in the market, depending on an investor’s specific needs,” explains Carpenzano. “Bond investors tend to be older and mainly looking for predictability and a recurring income stream.”
It’s also worth noting that the bond market is beginning to take some sustainable development issues into account using ESG criteria, meaning bonds can provide a way for investors to help finance the shift toward a greener, more responsible future.
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