Invest in Bonds

Learn more about government bonds, corporate bonds and mortgage bonds

What is a Bond?

When you purchase stocks, you are purchasing a small piece of a company. When you invest in bonds, you essentially are lending money to a company, government or organization that will repay their debt plus interest.

A bond is known as a negotiable debt security where a stock would be known as an equity security. A company, a government or an organization that borrows money issues a debt security in exchange: the bond. The lender can decide to sell the debt security to a third party who acquires the right to the interest payment and principal invested.

Most bonds have fixed interest, which is known as the coupon. The majority of bonds have a specific term after which the principal must be repaid. There are short-term bonds, which typically must be repaid in five years or less; intermediate-term bonds, which usually must be repaid in 5-12 years; and long-term bonds, which can include terms up to 30 years or more.

Types of Bonds

There are several different ways you can invest in bonds, including:

Government Bonds
Corporate Bonds
Mortgage Bonds

These are, as the name suggests, bonds issued by a government. For instance, the United States government issues Treasury bonds, which mature in 10 to 30 years. Government bonds tend to be the safest type of bonds, as they are backed by the government. Of course, some governments are more stable than others, so bonds in emerging and frontier markets may be riskier than bonds in mature markets such as the United States, Japan and the United Kingdom.

This is simply a debt security issued by a company. When a company needs funds, or capital, it might issue bonds. The risk associated with corporate bonds depends upon the overall health of the company, which is generally referred to as its bond rating, which we will talk about later in this article.

These are bonds that are secured by real estate holdings. Because the bond issuer has the option to sell the property or real estate if needed, the risk of these types of bonds can be lower than that of corporate bonds. Of course, when there is lower risk, usually the yields are lower, as well. Additionally, as we all remember, mortgage bonds weren’t a particularly safe bet during the housing crisis of 2008, when many bonds were backed by high-risk mortgages, known as subprime mortgages.

What Are the Benefits and Risks of Investing in Bonds?

In general, the most important advantage of investing in bonds is that they are relatively less risky than shares (stocks). In case of bankruptcy, a company must first repay bondholders and creditors and only then repay shareholders.

Of course, this lower risk also has a disadvantage: the risk premium linked to bonds is lower, which causes their expected return to be lower than that of shares over the long term. This means that if a company does well, the returns you enjoy with bonds probably aren’t going to be as high as the returns from shares. Bonds pay a set interest rate, while the value of shares grows as the value of a company grows.

The most important risks when you invest in bonds are as follows:

Credit Risk

Interest Rate Risk

Currency Risk

What is the Bond Market and How to Invest in Bonds?

Investors can take advantage of opportunities in the stock market or the bond market, and these markets are simply where bonds and stocks are sold or issued. With the stock market, there are several exchanges where stocks are bought or sold, such as the New York Stock Exchange, the American Stock Exchange, Nasdaq and more.

When it comes to bonds, the bond market is the marketplace where one goes to buy debt securities. Typically, investors either work with a broker or with an online brokerage firm to invest in bonds. In general, if you purchase bonds, you must purchase them with a high minimum investment, which can keep some investors away.

However, if you purchase bonds through a mutual fund or an ETF (exchange-traded fund), you can buy them also for a smaller amount. Additionally, there will be several bonds in the fund or ETF, diversifying the investment, which means it has relatively lower risk than purchasing bonds issued by just one entity.

How Can You Achieve a Return Investing in Bonds?

There are two ways that you can achieve a return when you invest in bonds:

Coupon Yield
Price Return

This is the return that is obtained from the periodic interest payments.

This is the return that is obtained when the market value of the bond increases. Reasons for this can be:

Reduced credit risk of the issuer. For instance due to an improved economy, operational improvements at the issuer, or because the bond is coming to the end of its term, meaning the chance of bankruptcy is reduced.
Falling market interest rates.

Note: As discussed above, the price return also can be negative. For instance, if the credit risk increases or interest rates increase, the price return could be negative.

Explaining the ways of attaining price return

Source: VanEck. The figure only considers the factors interest rates, price level and bond yields and does not take into account other criteria that could potentially negatively influence the bond price.

What Interest Rates Do Bonds Offer?

Interest rates are often measured along a so-called "yield curve". This shows the interest for different maturities.

Yield of EUR government bonds with an AAA credit rating

Source: VanEck.

In general, interest rates with shorter maturities are lower because they involve less credit risk for the lending party. However, this is not always the case. In the past, periods when short-term rates were higher than long-term rates were sometimes followed by recessions.

Corporate bonds also are influenced by today’s interest rates. Very solvent companies such as Novartis still have a relatively low interest rate on certain bonds (information as of 22 November 2022).

The place where you can achieve even higher returns is in emerging markets. Of course, this is balanced by an increased credit risk, and you generally also will run a currency risk. Emerging markets include countries such as Mexico, Russia, China, Brazil, India, Turkey and Indonesia.

How Should I Interpret Credit Ratings?

To help investors make the best decisions for their portfolios, bonds are rated by credit agencies such as Standard and Poor’s, Fitch, and Moody’s. These companies provide an estimate of the credit risk of some bonds. They summarize it in a score: AAA has the highest credit rating. C and D the lowest (these are often called junk bonds). But watch out: in the past, companies with high credit ratings have gone bankrupt. Thus, credit bureaus do not have a monopoly on the truth!

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Rating	Fitch	S&P	Moody's	Description (Moody's)
Investment grade	AAA	AAA	Aaa	Minimal credit risk
	AA+ AA AA-	AA+ AA AA-	Aa1 Aa2 Aa3	Very low credit risk
	A+ A A-	A+ A A-	A1 A2 A3	Low credit risk
	BBB+ BBB BBB-	BBB+ BBB BBB-	Baa1 Baa2 Baa3	Moderate credit risk
Sub-investment grade	BB+ BB BB-	BB+ BB BB-	Ba1 Ba2 Ba3	Substantial credit risk
	B+ B B-	B+ B B-	B1 B2 B3	High credit risk
	CCC+ CCC CCC-	CCC+ CCC CCC-	Caa1 Caa2 Caa3	Very high credit risk
	CC C	CC C	Ca	In or near default, with a chance of getting part of the loan back
	DDD DD D	SD D	C	In or near default, with little chance of getting back part of the loan

How Can I Set Up a Portfolio with Bonds?

If you want to reduce the risk in your investment portfolio, you could consider investing in bonds a portion of your portfolio. You could consider diversifying your bond allocation across government bonds and corporate bonds, and both across different regions.

VanEck offers bonds in the following categories:

Please contact us for more information:

Phone: +34 (91) 320 00 47
Email: EMEAinfo@vaneck.com