5 Safest Bonds to Invest
Date: 8 June 2016 Share on Twitter Share on Facebook
When amateurs start investing, the first port of call tends to be the stock market. This is unsurprising, as the stock market’s volatility, and, therefore, opportunities to make huge short-term gains when share prices are going up, give it an undeniable appeal. However, all it takes is a bear market to make investors realize that the stock market is not guaranteed to be a safe or easy place to invest your money. Bonds, on the other hand, which, during a bull market, seem to offer insignificant returns compared to stock, can be a far more secure and stable investment. Bonds are essentially a loan given by investors to governments or private companies, with a guarantee of yearly or monthly interest payments known as “coupons” (hence the term “fixed income”) and an agreed “maturity date” on which the issuer has to repay the borrowed amount. Here are five types of bonds to consider if you’re thinking of playing it safe on the fixed income market.
U.S. Savings bonds
U.S. savings bonds are widely considered the safest available. They generally offer interest rates that are competitive with the rest of the fixed income market, and come with a government guarantee of repayment of principal interest. They also give investors payouts in a different, more beneficial way compared to most bonds. Whereas most bond investments give investors coupons on a monthly basis, U.S. savings bonds accrue monthly savings for as long as the investor keeps their money in the bond. This means the investment, and therefore the monthly payout, is guaranteed grow with time, rather than simply providing a fixed payout each month and giving the same amount that they invested back to the investor on the maturity date. However, withdrawing the investment before the maturity date incurs a fine of three months’ worth of coupon payments, so this is not a bond for the impatient investor.
Short-term bond funds
Short-term bond funds invest in bonds that have a maturity date within one to three years of initial investment. This limited amount of time means that investors are unlikely to be affected by changes in interest rates.
Savings accounts are bonds issued by banks. They are amongst the safest options in the entire fixed income market. Just make sure that the money in your account is below the maximum stated by your country’s deposit insurance policy, which will cover your deposit if your bank goes bankrupt and is unable to pay out your deposit. The low interest rate in a savings account will not make you risk, but you can at least rest assured that your money is in a safe place.
U.S. Treasury bonds
Treasury bonds have one of the longest maturities of any bond, with a maturity date of between twenty and thirty years after initial investment. The coupon payments on the investment, therefore, continue for a long time, making these bonds a fantastic option for investors looking for a steady stream of income. The bonds are also a safe investment, with repayment guaranteed by the U.S. government. Like U.S. saving bonds, however, treasury bonds will incur a fine on investors who pull out of the scheme before the 20-year maturity.
Norwegian treasury bonds
Investors searching for rock-solid government treasury bonds beyond the shores of the United States need look no further than Norway. Norway has a stable economy that is one of the richest in Europe, backed up by a plentiful reservoir of natural resources. Its ten-year treasury bonds pay higher interest than U.S. ones: 3.9% rather than 3.5%. The catch is that most investors will not have a reserve of Norwegian krone, and therefore put themselves at the risk of losing money if the krone falls against their own currency after their investment.