Yes, this is a truly great time to buy bonds. Rates are no longer near zero, so there is the possibility of rates falling and your bonds will appreciate when they do. It is the best time in years to buy bonds. That answers your question.
In summary, bond investors generally prefer when prices go up, as this leads to capital appreciation, while rising yields (and falling prices) can negatively impact their investment value.
A combination of yields that are near multi-decade highs and interest rates that are expected to gradually fall through 2025 is creating an attractive opportunity for bond investors in the new year.
Strong 2024 performance may be tough to replicate given tight credit spreads, but we still have a favorable view on corporate bond investments given the strong economy.
For 2025, bond investors might want to make themselves comfortable with where yields have been in 2024. The US economy is expected to post steady growth, without overheating or sliding into recession. At the same time, inflation is expected to remain under control but not fall significantly.
If you're still in your 20s, 30s or even 40s, a shift toward bonds and away from stocks may be premature. The more time you keep your money in growth investments, such as stocks, the more wealth you may be able to build leading up to retirement.
While U.S. savings bonds are considered one of the safest investments, bonds issued by individual companies or municipalities may be risky if the issuer runs into financial difficulties.
Individuals do not pay tax on their bond gains until a chargeable event occurs. This tax 'deferral' is one of the features that sets bonds aside from other investments. However, when a chargeable event does occur, a gain will be taxed in the tax year of that event.
TAKEAWAYS: Not losing money by holding a bond until maturity is an illusion. The economic impact of market rate changes still impacts investors holding bonds until maturity. A bond index fund provides an investor with greater diversification and less risk.
While bonds are commonly used to manage risk in portfolios, high inflation can affect their performance. This is because the income some bonds pay will normally be fixed at the time it's issued.
In every recession since 1950, bonds have delivered higher returns than stocks and cash. That's partly because the Federal Reserve and other central banks have often cut interest rates in hopes of stimulating economic activity during a recession. Rate cuts typically cause bond yields to fall and bond prices to rise.
For example, if you redeem a bond after 24 months, you'll only receive 21 months of interest. Depending on the interest rate of your bond and your own financial needs, it's generally beneficial to wait until full maturity to redeem them.
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
Despite the recent rate cut, now is still a good time to buy bonds, according to Ryan Linenger, a Chicago-based financial advisor with Plante Moran. “High-quality bonds offer attractive yields today compared to the extremely low-rate environment we were in just a couple years ago,” Linenger says.
Bonds usually go up in value when the stock market crashes, but not all the time. The bonds that do best in a market crash are government bonds such as U.S. Treasuries. Riskier bonds like junk bonds and high-yield credit do not fare as well.
While shorter-term bond yields have declined significantly since 2023, yields on longer-term bonds are trending higher as 2024 ends. Investors appear focused less on recent Federal Reserve (Fed) interest rate cuts, and more on continued solid economic data and inflation trends.
Diversify Your Portfolio
Bonds, on the other hand, are safer investments but usually produce lesser returns. Having a diversified 401(k) of mutual funds or exchange-traded funds (ETFs) that invest in stocks, bonds and even cash can help protect your retirement savings in the event of an economic downturn.
$3,000 X 12 months = $36,000 per year. $36,000 / 6% dividend yield = $600,000. On the other hand, if you're more risk-averse and prefer a portfolio yielding 2%, you'd need to invest $1.8 million to reach the $3,000 per month target: $3,000 X 12 months = $36,000 per year.
One fantastic way to do that is with an exchange-traded fund (ETF), which allows you to buy shares like you would a stock and can be purchased with small amounts of money. If you've got $1,000 to invest right now, there are some very good reasons that money should go into an ETF that tracks the S&P 500.
Investing in mutual funds for jaw-dropping returns like 25% requires a balanced recipe of patience, risk tolerance, and timing. But still that may not be a realistic proposition. Let's get real here. A 25% annual return is like hitting a cricketing six, it's possible but don't expect it every ball.