Investing in bonds: fixed interest flexes its pecs after horror 2022

Investors were shaken and stirred by 2022’s bond collapse, but are now in the driver’s seat for financial gains.

In the history of the world, there has arguably been only one truly sexy bond.

His name is Bond, James Bond, he has a licence to kill, and has been known to emerge from the sea flexing large, shiny pecs.

The other bonds – a global market worth close to $200 trillion that dwarfs stock markets – are among the most boring investments out there.

You lend money to a government or company. They pay you interest on it. Whoopee!

For many years bonds plodded along paying increasingly low interest rates, but in 2022 their investors experienced huge excitement. Sadly it was all negative as the market suffered its worst returns in decades.

Many investors in bond funds saw the value of their supposedly-safe assets plunge 5-10 per cent as fast-rising interest rates reduced the appeal of previously-issued bonds and they were replaced with shiny new higher-interest versions.

Investors, many of them retirees not used to watching their conservative assets stripped of value so quickly, were shaken, stirred and spat out on the footpath of financial turmoil.

However, after 2022’s pain, bonds are bringing sexy back to investors’ portfolios, and there are several ways to grab some of the action.

Here’s why they may be worth a lustful look right now.

BOTTOMS UP

Many bonds lost value as interest rates surged, but we are currently nearing the peak of central bank rate rises in Australia and around the world, according to many forecasters.

Actor Daniel Craig’s James Bond pecs caused a stir in 2006 film Casino Royale.

That means when rates start falling again, possibly later this year, the values of many bonds will rise again.

We’ve seen this before. During the global financial crisis, when central banks slashed rates to try to save their economies, bonds were one of the best-performing assets as shares halved in value in many markets.

GOOD RETURNS AGAIN

In the meantime, higher interest rates mean higher income returns from many bond investments.

Also known as fixed income, they span government and corporate debt. While more corporate collapses are likely as high interest rates stoke recession fears, most bond investment funds diversify across a wide range of borrowers. You are lending to a handful of businesses that are going to hit the wall.

EASIER TO ACCESS

Bonds previously could only be bought directly by investors with very deep pockets, or through managed funds that often charged high fees.

Today there are close to three dozen exchange traded funds that focus on fixed income and are listed on the ASX. These can be bought just like any share, and investors can choose whether to target corporate, government or a diversified mix of bonds.

New platforms are also emerging. The CEO of fixed income micro-investing app Blossom, Gaby Rosenberg, says bond investors can begin with as little as $1.

FLIGHT TO SAFETY

Blossom targets 4.5 per cent returns and has seen a lot more younger investors signing up, especially amid the recent bout of global financial market turmoil.

It does make sense. While share markets may fall sharply in the coming weeks or months if the US and European banking crisis flares up, bonds have had their bad run and will once again be relatively safe and secure.

And if bonds still bore you, another option to make your money work harder is banks’ term deposits or bonus savings accounts, with many currently paying 4 or 5 per cent interest.

Originally published as Investing in bonds: fixed interest flexes its pecs after horror 2022