Factors to know about bonds:
The following are 5 things that you understand about bonds to make sure that the rising rates do not give you any unpleasant surprises.
1. Increasing rates affect the price of the bonds- many people who invest their money in the bonds make the mistake of believing that the rising yields on the bonds are a good thing. It is true in case of new investors, as they newly issued bonds will have higher interest rates than the old bonds. However, if you already own bonds then with the rise in the yield of the bonds, the value of the bonds will fall. It is for the reason that higher rates come out and the lower bands become less attractive to investors comparing it, so buyers do not like to pay as much for the bonds, causing a drop in the prices.
2. Long term bonds are better when there is a change in the rates- investors get high rates when they buy bonds for the long term. The yield increase hurts the value of the long term bonds a lot more than the short term bonds. This is because the longer your bond is locked in low rate, you will lose more interest as you are stuck with the bond. On the contrary even if there is a substantial rise on the bond rates which are to be matured in a few months there is not much that you will lose as you can make money at maturity and reinvest your money at a bond with higher rates. Therefore investment expert advice on investing in short term bonds.
3. Individual bonds have an advantage over bond funds-many investors buy binds for a diversity rather than individual bonds. If you have a good amount of money to invest then you have a lot of different bonds to invest in, but for individual bonds you need to have hundreds of thousands of dollars for it. But one advantage with the individual bonds is that even with the decline in market value there can be full recovery for individual bonds at the maturity time. But with bond funds, the capital loss is permanent.
4. Municipal bonds have attractive benefits- in the bond market, the results vary for different niches. Muni bonds usually have lower yields than the treasuries. It is for the reason that the former is exempt from the federal tax with great tax returns than treasuries and other bonds. Though the mini-bonds investment has some risks, higher yields from the Muni-bonds have made the investors take the risk.
5. Inflation protected bonds to lose value- most of the bonds are vulnerable to inflation. It is for this reason that bands like TIPS have become popular as they are protected against inflation. The rise in the bonds lately is not because of the inflation fear but from the possible policy changes. Therefore, TIPS yields have risen and yet the prices have declined.
Investors have to be careful with the bonds and keep in mind these 5 tips before investing in bonds.