Estably Blog | Bonds
Buy a bond yes or no:
Will the bond boom return in 2024?
Will the bond boom return in 2024?
An investment form that has almost been forgotten by many investors is on the rise again: We are talking about the fixed-interest security, better known as a bond. It works like a bond for which you receive interest, but which you can trade on the stock exchange and therefore fluctuates in value. Is the rising interest rate environment making buying bonds attractive again for savers and investors? Find out more in today’s article!
The most important facts in brief:
- Bond indices closed 2023 consistently positive (USA (+5,53%), Eurozone (+7,19%))
- Between 1900 and 2020, bonds denominated in US dollars yielded an average of 4,90% p.a.
- Bonds often form the safety anchor in equity portfolios (as they are less volatile and less risky)
- Estably Value portfolios are also made up of different proportions of bonds
- The shorter the investment horizon, the more bonds are recommended
Bonds, once considered old-fashioned and neglected by many investors, are currently experiencing a fascinating renaissance. What is the first thing that comes to mind when you hear the term bond? Conservative, low yield, dusty and perhaps you even feel reminded of the times of the great seafaring nations, trading companies or the “Gilded Age” (the name given to the period towards the end of the 19th century when colossal monopolies dominated the economic world)? But bonds are back – and have shed their supposedly antiquated image. They are seen as a strategic instrument for a balanced portfolio, smooth the waves and are also quite fun from a yield perspective.
In today’s article, you can find out everything you need to know about buying bonds, what types of bonds there are, what terms you should know and how you can now skillfully integrate bonds into your individual investment strategy with the help of Estably. You can look forward to the following points in detail:
Contents
- 1 What are bonds?
1.1 The exciting history of bonds
1.2 Different types of bonds
1.2.1 Government bonds
1.2.2 Corporate bonds
1.2.3 Subordinated bonds
1.2.4 High-yield bonds
1.2.5 Convertible bonds
1.2.6 Covered bonds
1.3 For whom does it make sense to buy bonds? - 2. which terms should be known when buying bonds?
- 3. how exactly do bonds work and how is the yield calculated?
- 4 What is the current situation on the bond market?
4.1 Recent developments
4.2 Yield prospects - 5 What options are there for buying bonds?
5.1 Bonds (individual securities)
5.2 Bond funds and bond ETFs
5.3 Value Investing (Estably) - 6. buy bonds easily now (via Estably in Liechtenstein)
- 7. conclusion on the topic of bonds and helpful tips for investors
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1 What are bonds?
Bonds are the silent architects of the financial system. They represent an agreement whereby investors lend capital to governments, companies or institutions. In return, they promise regular interest payments and the return of the borrowed amount on maturity.
Unlike pure credit, bonds (like shares) are often traded on the stock exchange and, like shares, are categorized as “securities”. In the following subsections, you can read more about the really exciting history of bonds, the different types of bonds and who this asset class is particularly suitable for.
1.1 The exciting history of bonds
The early history of bonds stretches from the Italian city states in the Middle Ages, which created innovative financial instruments for monumental building projects, to the first stock exchange trading in the 17th century and the industrial revolution in the 19th century, which prompted companies to use bonds for their expansion.
Today, in the 21st century, bonds remain a fundamental element of the global economy, dominated primarily by government and corporate bonds, which characterize the financial landscape.
1.2 Different types of bonds
- Government bonds: security in the shadow of national treasuries.
- Corporate bonds: Interest-bearing securities of the business world and financiers of entrepreneurial spirit.
- Subordinated bonds: For the daring, which are only serviced after other creditors in the event of insolvency.
- High-yield bonds: The “yield stars” among bonds with very high risk.
- Convertible bonds: True chameleons that convert between bonds and shares.
- Pfandbriefe: Solid securities, backed by property.
1.2.1 Government bonds
Government bonds (e.g. German government bonds) offer a safe haven for investors as they depend on the stability and creditworthiness of a country. The advantage lies in the low probability of default, but low yields can be disadvantageous for yield-oriented investors.
Term: usually 2 to 50 years
1.2.2. Corporate bonds
Corporate bonds (for example Apple bonds) enable investments in the growth prospects of companies. Yields are often higher than on government bonds, but the risk of default is greater.
Maturity: usually 3 to 20 years
1.2.3 Subordinated bonds
Subordinated bonds (e.g. Volkswagen hybrid bond) offer higher interest rates, but require the courage to bear a higher insolvency risk. In the event of a company bankruptcy, creditors are only serviced after others, which represents an increased risk.
Term: usually 5 to 30 years
1.2.4. High-yield bonds
High-yield bonds (such as the Tesla high-yield bond) promise high returns, but are associated with considerable risk. They are attractive for investors who are willing to take risks and accept a possible risk of insolvency in order to achieve higher returns.
Term: usually 5 to 15 years
1.2.5. Convertible bonds
Convertible bonds (e.g. IBM convertible bonds) combine the best of both worlds: Bonds offer security, while the possibility of conversion into shares offers growth potential.
Term: usually 5 to 20 years
1.2.6. Mortgage bonds
Pfandbriefe (e.g. Commerzbank Pfandbriefe) are collateralized by real estate, which gives them stability. They offer comparatively low yields, but are a safe choice for conservative investors who priorities stability and capital preservation.
Term: usually 5 to 15 years
1.3 For whom does it make sense to buy bonds?
Bonds are comparatively universal securities that are suitable for pretty much every type of investor. However, they are particularly suitable for the following types of investor:
- Conservative investors (due to low volatility, fixed redemption date and low risk)
- For investors with a short-term surplus of liquidity (relatively safe way of parking funds until they are needed elsewhere)
- For better diversification (as an addition to riskier asset classes)
for income-oriented investors (as bonds offer regular interest income) - Investors with a short investment horizon (especially shortly before retirement and pension age)
Our personal tip for you:
“At Estably, we integrate bonds into our portfolios to ensure stability and diversification. Especially for conservative investors who need short-term liquidity or are looking for regular income, bonds are a smart choice. Discover the versatility of this financial instrument in your personal portfolio and let us explain this great investment instrument to you personally!”
Estably Vermögensverwaltung AG
Schaanerstrasse 29
9490 Vaduz
Liechtenstein
Curious about personalized advice and tailor-made strategies for your individual situation? Get your free and non-binding initial consultation with us now!
2. Which terms should be known when buying bonds?
Compared to other asset classes, such as shares, bonds are a completely separate financial instrument with a very specialized vocabulary. Before we take a closer look at how a bond works, we would therefore first like to explain all the important terms to bear in mind when buying bonds:
Issuer
This is the issuer of the bond (e.g. a state or a company).
Holder
This is the buyer of the bond (i.e. the investor and therefore potentially you).
Maturity
The maturity date of a bond is the date on which the issuer – i.e. the issuer of the bond – is obliged to repay the nominal value of the bond to the holder. This date marks the end of the term of the bond.
Duration
The duration of a bond corresponds to its total term or maturity. This is the period from the issue date to the end of the term. The duration significantly influences the risks and opportunities associated with holding a bond.
Remaining term
The remaining term of a bond indicates how much time is left until maturity. This parameter is crucial for investors as it provides information on how long the invested capital is tied up and to what extent future interest payments can be expected.
Nominal value
The nominal value always corresponds to the value that the issuer repays to the holder after maturity.
Coupon
The coupon of a bond is the fixed interest rate that the issuer regularly pays to the bondholder. The coupon is expressed as a percentage of the nominal value and influences the current income that an investor earns by holding the bond.
Basis point
A basis point is a unit of measurement for the change in interest rates or yields. One basis point corresponds to one hundredth of one per cent. This unit is used to describe precise changes in interest rate markets.
Market value
The market value of a bond represents its current market price. This can be above or below the nominal value and is influenced by supply and demand. Changes in market value have a direct impact on potential gains or losses on a sale before maturity.
Yield
The yield on a bond indicates the percentage return an investor can expect on the capital invested. It takes into account both interest payments and any price changes. The yield is an important indicator of the profitability of a bond investment.
Our personal tip for you:
“Yield opportunities are not only available at maturity. The secondary market harbours exciting opportunities – to buy or sell bonds below or above par value. Skilful transactions before maturity create lucrative deals. With bonds in particular, the individual investment strategy can therefore be kept dynamic. For further information on this exciting topic, please feel free to contact us personally!”
Estably Asset Management Ltd
Schaanerstrasse 29
9490 Vaduz
Liechtenstein
Curious about personalized advice and tailor-made strategies for your individual situation? Get your free and non-binding initial consultation with us now!
3. How exactly do bonds work and how is the return calculated?
Bonds, fixed-interest securities, annuities, debentures or even debenture bonds – there are many names for basically one and the same thing. Basically, bonds securities the right to get your invested capital back at the end of the term (and of course to receive interest on your money in the meantime).
"Bonds are the contract that provides stability and income."
In simple terms, a bond is like a loan that you grant to governments, companies, banks and institutions. In return, you receive regular interest (coupons) and, at the end of the term, the entire capital back. In the meantime, you can also sell the bonds to other stock exchange participants or even buy current bonds yourself.
"Credit rating: The mirror that shows the financial health of the bond issuer."
The credit rating is an important factor in the valuation of bonds. The rating categories for bonds can vary depending on the rating agency, but the following ratings are quite common:
- High quality/first class credit rating: AAA, Aaa
- Good credit rating: AA, Aa
- Solid credit rating: A
- Average credit rating: BBB, Baa
- Speculative / Poor credit rating: BB, Ba
- Highly speculative: B
- High risk area: CCC, Caa
- Default risk / Default probable: CC, Ca
- Default will occur: D, C
Ready for a closer look at the current bond market? Then look forward to the next section!
4. what is the current situation on the bond market?
“Bright to cloudy” is probably the best way to describe the current situation. After bonds seemed to have been all but written off for private investors during the low-interest phase of the Fed and ECB, they are now coming back to life. The first half of 2023 in particular saw a sharp rise in new issues (especially in the area of corporate bonds).
Find out more exciting information about the current situation on the bond market in the following subsections.
4.1 Recent developments
In 2022, the bond market experienced a variety of developments, including some challenging events such as interest rate hikes, inflation concerns and geopolitical tensions. These factors led to volatility and uncertainty on the bond market. Even well-known bond indices closed with losses in the double-digit percentage range in some cases.
The year 2023 was also bumpy at the beginning, but in the end there was to be a plot twist on the bond market. Initial optimism, interest rate rises and persistent central bank rhetoric initially created persistent headwinds until the third quarter. The broad US bond market recorded a negative performance of -1.21%, while the European market closed just positive at +0.59%.
However, investor confidence increased in the fourth quarter due to positive inflation data and central bank comments. Falling market interest rates led to a rise in bond prices, particularly in the corporate bond sector. Despite initial uncertainties, the year ended with positive developments: For example, the general US bond indices rose by +5.53%, those of the eurozone by as much as +7.19%, and corporate bonds even recorded impressive gains of +8.52%, and +8.19% respectively.
The recent recovery at the end of 2023 and beginning of 2024 now offers attractive entry opportunities for investors who recognize long-term value potential and want to benefit from the lower share prices.
4.2 Return prospects
Falling inflation (only 2.80 per cent forecast for 2024), optimistic economic prospects, low credit risk for issuers and expansive monetary policy measures by central banks in Europe and the USA are currently having a positive impact on the interest rate level of bonds. The following coupons are currently available for 10-year government bonds (depending on the country):
Source: https://de.statista.com/statistik/daten/studie/77722/umfrage/rendite-von-zehnjaehrigen-
government-bonds-by-european-countries/
This results in an average value of around 2.71 per cent (which already almost compensates for inflation) – meanwhile, interest rates of 3.58 per cent on average are even possible for corporate bonds.
Our personal tip for you:
“In today’s diverse bond landscape, we recommend focussing on corporate bonds with first-class credit ratings. In contrast to government bonds, which offer lower or sometimes even negative yields, corporate bonds not only offer more attractive returns, but also remarkable stability. This combination of yield and stability creates a solid foundation for your portfolio and also promises promising long-term performance!”
Estably Asset Management Ltd
Schaanerstrasse 29
9490 Vaduz
Liechtenstein
Curious about personalized advice and tailor-made strategies for your individual situation? Get your free and non-binding initial consultation with us now!
5 What options are there for buying bonds?
Let’s dive into the practical world of bond buying. From individual securities to bond funds and special bond ETFs through to the Estably Value Investing approach – discover the many ways in which you can invest in the world of bonds. We will now explain everything you need to know about the individual product types and how trading works in detail.
5.1 Bonds (individual securities)
You can put together customised portfolios with individual bonds. They are available from banks, brokers or directly from issuers. Denominations vary, with some starting at 1,000 francs, euros or US dollars. However, the disadvantages here are the limited diversification and the higher risk of default (if individual bonds become non-performing). The purchase also requires a certain amount of market research and an understanding of the issuer’s creditworthiness, and therefore a lot of time and effort.
5.2 Bond funds and bond ETFs
Bond funds and bond ETFs, on the other hand, offer broader diversification via active and passive fund managers. Available on stock exchanges or from banks, they make it much easier to access bonds. Denominations are available on a pro rata basis, often from 50 euros. However, high management costs (especially for bond funds) can be a disadvantage here. Bond funds and bond ETFs can also be purchased via brokerage accounts (as you may already know from buying shares). You can use the corresponding security symbols (for example the ISIN [for: “International Security Identification Number”]) to find the respective bond fund or bond ETF and buy the desired amount.
5.3. Value Investing (Schätzungsweise)
The favorable investment portfolios from Estably offer a worthwhile alternative, which are composed of different proportions of bonds and equities depending on the individual investment objective or investment horizon. In particular, our Modern Value product offers first-class opportunities for variation:
Estably’s experienced team carries out regular rebalancing’s and, with its expertise, saves you a lot of time when it comes to individual investments and the search for high-quality bond products. In terms of returns, this option also puts you well above the yields of individual bonds or bond ETFs.
6. Buy bonds easily now (via Estably in Liechtenstein)
Curious about the topic of bonds and how they can enrich your individual investment? Then get in touch with the friendly team at Estably Asset Management in Liechtenstein today! Our hand-picked portfolios offer you uncomplicated access to this important asset class, which offers you stability and regular income.
The Principality of Liechtenstein also offers attractive advantages: a stable political environment, highly developed financial infrastructure and regulatory efficiency. As an independent financial Center, it offers international investors flexible portfolio management, broad diversification and discreet asset management.
"Where financial innovation meets historical stability -
Welcome to Liechtenstein, welcome to Estably!"
diverse portfolios together with our experts
7 Conclusion on bonds and helpful tips for investors
Bonds are currently experiencing a major comeback as a strategic instrument for balanced portfolios. At a time of higher interest rates, they offer stability and profitable returns. Diversification through different bond products and asset classes – for example equities and corporate bonds as well as fixed-term deposits and cash – enables investors to reflect their individual risk tolerance. Overall, the Estably Value Investing approach offers the most comfortable and sustainable way to achieve this.
Estably, based in Vaduz in the Principality of Liechtenstein, provides investors not only with access to first-class portfolios, but also to the attractive advantages of a stable and flexible financial centre. Recognised in articles by Forbes, Focus Money and wallstreet:online, it offers private and institutional investors a wide range of first-class financial services. Not yet a client of Estably? Then we look forward to getting to know you free of charge and without obligation!
Let us advise you on the topics of finance, asset management, capital investment and much more!
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About Estably
Estably is the first digital asset management company from Liechtenstein to offer first-class wealth management through a blend of technology and human investment expertise. Thanks to the portfolio managers’ many years of experience in the field of value investing, the aim is to achieve above-average returns. The aim is to make professional asset management, which was previously exclusively available to major investors, accessible to everyone – conveniently, transparently and profitably.
