3 Reasons Why Investors Fell in Love with the US Bond Market

 In Bond Investing

US bond market

The bond market in the US has taken a lot of heat in recent weeks. Returns are so low that investors are effectively paying for the privilege of playing the game, and not making much of a return at all.

That is, unless you consider the corporate US bond market.

In order to realize just how effective bonds can be as investment vehicles, you need to get away from the general market. When you do, you’ll come to realize just why so many investors have fallen in love with the US bond market.

It definitely offers a more palatable alternative to markets that are swaying violently due to Brexit and other factors.
Bond Investing Fundamentals

The US Bond Market Offers the Only Significant Return

One of the most compelling reasons for investors to love the US bond market is the fact that it is one of the only options actually offering some sort of return on their investment.

As you can see from the chart below, while the market value share of the bond market hasn’t risen dramatically, the share of yield income has spiked significantly.

US bond market

So, while share of the return on bonds isn’t astronomically high, it is around 33% and promises to continue moving forward.

Couple that with the fact that these investment vehicles take a couple of years at the least to mature, and you can see that while they offer slow growth, that is better than no growth.

And, considering the fact that we are now approaching peak valuation for the stock market, with an imminent plunge that will take at least four decades from which to recover, slow growth seems to be the smartest way to go.

One needs only to look at the actions of the European Central Bank to prove that bonds are hot right now. The ECB continues to buy up corporate debt within the EU, and US corporate bonds give investors in the States the same opportunity.

For a more in-depth explanation of the incipient market meltdown and how to safeguard your wealth, Mohamed A. El-Erian’s book The Only Game in Town is a must-read.

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It Makes a Smart Decision for Retirement

Another reason that so many people have fallen in love with the US bond market is the fact that it gives them access to corporate bonds that make excellent investment choices for many people, particularly for Baby Boomers anxious about their retirement years.

Treasury returns are undeniably low, although in high demand. However, corporate bonds offer not only a viable alternative, but a reliable one that can provide better performance than most stocks, even in today’s overvalued state.

Consider the fact that the only real ramification a company might face from cutting their dividends is a reduction in their stock value. That might seem to be a stinging penalty, but it’s really not. After all, stock prices have very little to do with how successful a company might be. They’re indicators, not enforcers.

Corporate bonds, on the other hand, are much more important to companies. If the business isn’t able to raise the capital needed with sales of bonds, they end up in default. This is enforcement – bond sales drive business success, unlike stocks, which only indicate success or failure.

There’s another reason to choose bonds over similar options like bond funds. Bonds mature (bond funds do not), and when they do, the company must pay out the face value of the bond. If they fail to do so, they default. Because bonds mature, they offer reliability, peace of mind and security in a world that is short of such options.

Finally, retirees will appreciate the fact that bonds can be combined into a “ladder” that provides security well into the future. In this instance, the slow growth these are known for is actually an asset, rather than a liability.

Creating a bond ladder is relatively simple, and only requires that you split your investment money into multiple bonds that will mature incrementally.

For instance, you’d put money into 10 different bonds, each of which will mature a year after the previous one. In this way, you have a steady stream of income on which you can count for a full decade (or however long you decide to make your ladder).

The only drawback here is that each year brings you closer to the top of the ladder and the last bond to mature.

Riding the Technology Wave

Take a look at the investments that tech giants are making today. Do you see them snapping up stocks? No. Do you see them investing heavily in infrastructure or equipment that will be devalued within a few years? Not really. So, what are they doing?

If you look at the likes of Apple, Oracle and Google, you’ll find them investing in corporate bonds. They’re buying up company debt like there’s no tomorrow. Why is this? Actually, there are several reasons.

First, corporate bonds mature in just a couple of years, making them short-term investments for technology companies. Second, they offer much better yields than treasuries. For mid-2016, corporate bonds have yielded 1.82%, while treasuries linger at 0.90%.

In the end, the US bond market, particularly corporate bonds, offer stability, growth and a definite return. None of those things can be found in the stock market, and as we creep closer to peak valuation and the inevitable market downfall, it is more and more important for all investors to have solid bedrock underpinning their financial future.

Make no mistake – a meltdown is in the works. It is unavoidable.We’ve experienced a 40-year climb into the stratosphere that is unparalleled in history. It is that very fact that will precipitate the end. Of course, it won’t be THE end, but it will be an ending, and investors caught with their pants down will suffer greatly.

By putting money into corporate bonds and diversifying your portfolio, you hedge against disaster and ensure that if worse comes to worst, you’ll not be left penniless.
Bond Investing Fundamentals

Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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