(Time-Sensitive) An Opportunity in the Bond MarketApr 22, 2023
Last March, I shared about bonds and how it’s related to the US Banking Crisis, which caused a lot of fear in the market. In line with Warren Buffet’s saying, “Be fearful when others are greedy, and greedy when others are fearful," this article will now focus on the opportunity in bonds.
This is a time-sensitive opportunity because we cannot predict exactly how long it will be available. So, do give the article a full read in case you want to take advantage.
If you’d like to jump straight to the opportunity, feel free to scroll down below to the section on “The Big Opportunity”...
Whereas, if you'd like to understand the story of what’s creating this opportunity, then read on.
Foundation: What are Bonds?
Bonds are loans given by investors to the borrower. When you buy a bond, you're lending money to the bond's issuer for a fixed period of time. In exchange, you'll receive interest payments on a regular basis. Then, the principal amount will be paid at the end of the agreement.
For example, let's say Sarah bought a $2,500 corporate bond with a fixed interest rate of 5% and a maturity date of 10 years from now. This means that for the next 10 years, Sarah will receive $125 each year (which is 5% of $2,500). Then, when the bond matures, she'll get back the principal amount of $2,500.
This is a basic example of a bond, and note that there are many other different types. For simplicity, we won’t discuss them anymore. Instead, let’s move forward with how money is normally made with bonds.
How Money is Made from Bonds?
There are two ways we can earn money by investing in bonds.
Way #1: Holding Bonds to Maturity
When investors hold bonds to maturity, they will earn money through regular payments. And the principal amount of the bonds is returned once they’ve matured. With this, keep in mind that time is money. We leverage time to make money from bonds.
In our sample above, if Sarah holds on to her bonds for the whole 10-year duration, she will have $125 each year. With these regular interest payments, she will earn a total of $1,250 by the time the bonds mature. And of course, she'll receive her original investment back, too.
This method is considered low-risk, as long as the bond issuer makes good on the payments. Then, since Sarah knows how much she’ll earn each year, she can also include it in her financial planning.
Way #2: Buying and Selling Bonds
In order to understand this second method, we have to distinguish between a bond's ‘face value’ and ‘market value’.
A bond’s face value is how much it will pay out at maturity. In the example of Sarah, she will receive $2,500 when it matures. So the bond’s face value is $2,500.
This is different from a bond’s market value, which is the price at which two parties are willing to sell and buy bonds. This can be done because bonds are essentially ‘assets’ that can be bought and sold as well.
To make a quick oversimplified example, let's go back to Sarah, who has bonds worth $2,500 that have a 5% interest rate for a 10-year maturity period.
It is now 5 years in, and Sarah has already received 5 payments of $125 (for a total of $625). But she is in sudden need of cash, of about $2,200… So she asks her friend John if he would be willing to buy her bond for $2,200.
If John accepts, he’d only pay $2,200, receive $125 for the next five years, and then get back $2,500! After consideration, John accepts and buys the bond from Sarah.
From here, the bond's market value is now $2,200 (which is again different from the face value).
In real life, bonds aren’t typically sold in one on one conversations. Instead, it’s all done in an automated, computerized system where bond buyers and sellers just input the prices they want to buy and sell, and the computer does the matching for them.
Knowing this, we’re now ready to tackle the next topic of how bonds are bought and sold. Then we’ll be ready to discuss the big opportunity.
How to Invest in Bonds
When it comes to investing in bonds, there are also two options.
Option 1: Buying Individual Bonds
This option means researching which companies, and if the government is issuing any bonds for investments. Then applying for and eventually purchasing bonds from those institutions.
Typically, individual bonds are offered in amounts of $1,000 and above. This means that in order to build a diversified portfolio, you'll need a substantial amount of money.
This is why, for retail investors, purchasing bonds here isn’t a recommended option. It’s only advised for those who truly enjoy researching and doing “Do-It-Yourself” investing and have sizeable capital.
Option 2: Buying Bond Funds
Bond funds are the “pooled” type of fund where many investors “pool” their money together to be managed by a “fund manager." It will then be up to the bond fund manager to do the research and the buying and selling of bonds based on market conditions.
With this option, retail investors will gain immediate diversity in the bond market without the need for extensive research or lots of capital.
Now that we have covered all the pieces, we can discuss the opportunity in bonds today!
What’s the Big Opportunity in Bonds Now?
There are two main events that are contributing to the opportunity in bonds now.
- Bond market prices have been decreasing because interest rates have been going up.
- Banks are ‘selling off’ their bonds to increase their liquidity, as explained in the US Banking Crisis article.
In other words, bonds are extremely cheap today. And when we buy cheap, we’re able to get greater returns. How big exactly?
Well, here’s a screenshot of the potential yields in some bond funds…
As you can see, some bond funds are giving out dividends as high as 10.19%! In a regular market, bonds only typically give returns of 2-4%... So 10% is really huge!
The extra advantage of bonds is that it’s seen as a much lower-risk investment compared to stocks and equities.
Having said that, this opportunity is best considered by:
- Investors who are risk-averse and think stocks and cryptos are too volatile and want ‘fixed returns’ in their investments.
- Experienced investors who are looking to add lower-risk investments to their portfolios while securing higher returns.
- Those who are willing to invest for at least a 5-10 year time frame.
Important Disclaimer: This article is not a recommendation for any specific fund or investment. Rather, it’s just to highlight the unique opportunities available in the market today. I advise everyone to consult a financial advisor before investing.
For those who’d like to get assistance from me in making the most of this opportunity today, you can schedule a call with me here. I’ll do a comprehensive financial review first to make sure that this investment is actually suitable for your specific financial goals and situation.
But Wait, There’s More!
Aside from the bond market being very cheap, there is an additional factor that imakes this a unique opportunity.
Because financial institutions are in a highly competitive market, they are willing to offer many incentives and bonuses to get new clients. These bonuses can even increase the first-year yields by up to 16%!
This is why, for my clients who are more ‘aggressive’, instead of topping up their stock investments, they’re now opting into this opportunity in bonds.
Meanwhile, my most conservative clients (who rarely invest in stocks) are also very interested in this because it’s a faster way to grow their money with less risk.
Now, as for how long these promotions will last, I can’t really say. That’s why I’ve written this simple article to hopefully inform more people about this opportunity.
Again, please consult a financial advisor before making any investment decisions. If you’d like to get my assistance, book a call here, and let's maximize your wealth potential. We'll do a full financial review to see if this would be a good fit.