Investing In Bonds Doesn't
Guarantee You 100% Safety.

Investing in Bonds is a wise diversification investment strategy that can provide stability and security against the volatile gyrations of the stock market.

Investing in Bonds can also ensure a steady stream of income even when other asset classes like property and shares are falling.

What Is A Bond?

A bond is a debt security... or in plain English an I.O.U.

And everybody knows that an I.O.U. is only as good as the issuer behind it.

The same goes for bonds.

Are Bonds Totally Risk Free?

The answer is a definite No!

Some of the risks to bond holders are:

safe investing railroad bond
  • Default. The U.S. Railroad Crisis saw 36% of bonds default between 1873-1875. Between 1929-1932 the default rate rose to 13%. The highest annual default rate rose to 16%.

  • Credit rating agency Standard & Poors recently downgraded Greece's credit rating to BB (or "non-investment-grade or junk"). Bondholders were warned they might get back as little as 30% of their investment if Greece restructured its debt.

  • Chasing higher yield in bonds with lower credit ratings or longer maturity dates carries higher risk.

  • safe investing russia emblem The Sovereign Risk of AAA rated countries (e.g. USA, Germany, Australia) is safer than low-end-investment-grade BBB (e.g Russia, which actually defaulted to the tune of $72 billion in 1998... bond prices crashed 80% in a month).

  • Rapidly rising interest rates can decimate the returns of long term bondholders.

  • In the same credit rating bracket Sovereign Debt is often preferred, followed by Municipal Bonds, then Corporate Debt.

  • Foreign bondholders are at the mercy of extreme currency fluctuations which can either magnify their returns or wipe them out.

  • Instead of defaulting, debtor nations may try to create hyper-inflation to eliminate debt thus repaying bondholders in devalued currency.

  • safe investing us bankruptcy sign Credit rating agency Fitch recently warned that U.S. municipal-bond defaults were likely ( due to falling revenues), especially on non essential projects. This happened in 2004 when Cicero City Council, New York stopped debt service on $15 million of bonds sold in 2001 to build an ice-skating rink. More recently Jefferson County, Alabama was declared insolvent after $3.2 billion debt refinancing for a sewer system collapsed.

  • Ba/BB rated Corporate bonds have a historical default rate of 19% (Moody's) to 29% (S&P).
    B/B rated Corporate bonds have a historical default rate of 43% (Moody's) to 53% (S&P).
    Caa/CCC-C rated Corporate bonds have a historical default rate of 69% (Moody's and S&P agree on this one).

Buying And Selling Bonds.

Many investors will feel more comfortable seeking the help of a licensed or registered financial professional when committing their savings to bonds.

Full-service brokers offer a wide range of services. They can advise what type of bonds are suited to the investor's risk profile, needs and investment goals. They can provide research (e.g. Credit Rating Analysis, Yield Curve projections, Tax Exemption status, Bond Insurance, etc).

Other investors may prefer the easier way and pay a fund or unit-trust manager fees/commissions to do the worrying and manage the risk for them. This usually also allows smaller amounts to be invested across a broader range of bond types.

Sovereign Debt Crisis the Next Bubble....Marc Faber.

Sovereign Debt Crisis postponed not solved... Harvard Professor Niall Ferguson.

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