Buy Bonds Now
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So where does that leave bonds now Potentially in a very attractive place. Many of the factors that hurt bonds in 2022 may work toward helping their performance in 2023, experts say. But that doesn't necessarily mean it's time to pile your portfolio into bonds.
\"The Federal Reserve raised rates more than they have in 40 years. That caused massive losses inside of bonds,\" says Robert Gilliland, managing director at Concenture Wealth Management. \"It's important to understand that bonds are generally secure, but not necessarily safe.\"
As a series of interest rate hikes eroded the value of bonds in 2022, it also did 2023 bond investors a couple of favors. For one, bonds are now offering more attractive interest payments to investors. At the beginning of 2022, a six-month Treasury bond paid an interest rate of 0.22%. The same bond today pays 4.76%.
Even if bonds may seem attractive right now, that doesn't mean long-term investors should abandon an all-stock portfolio in favor of adding bonds, says Pszenny. While the bond market suffered in 2022, so did the tech stock-heavy Nasdaq 100, an index with greater potential for high long-term returns.
In other words, if your original plans didn't include bonds, don't include them now. \"Once you pick your asset allocation, unless something changes with your goals or time horizon, stick with your current allocation,\" Pszenny says.
If your plan already includes a bond allocation, consider moving to longer-dated bonds, Pszenny says. That's because bonds with longer maturities tend to be more sensitive to moves in interest rates. Should the Fed begin decreasing interest rates, long-term bonds will be the biggest beneficiaries, he says.
Some of your investing goals may be coming up sooner than a long-term goal like retirement, such as hosting a wedding or buying a house. Depending on how far out your goal is, you may want to hold a mix of stocks, bonds and cash.
This page focuses on buying for yourself or a child whose account is linked to yours. If you are planning to give a savings bond as a gift, also see our page on Giving savings bonds as gifts. You can print a certificate announcing your gift. See our selection of announcement cards.
In any one calendar year, you may buy up to $10,000 in Series EE electronic savings bonds AND up to $10,000 in Series I electronic savings bonds for yourself as owner of the bonds. That is in addition to the amount you can spend on buying savings bonds for a child or as gifts.
For example: If you want to buy $50 Series I savings bonds and you ask your employer to send $25 from each paycheck to your TreasuryDirect account, we issue a $50 bond for you after every other payday. You don't have to think about it again or do anything else. You keep getting more savings bonds automatically until you change or end your Payroll Savings Plan.
We may issue multiple bonds to fill your order. The bonds may be of different denominations. We use $50, $100, $200, $500, and $1,000 bonds. Again, the amount of your purchase can be any multiple of $50, from $50 to $5,000. You need to tell us only the amount. We determine denominations.
On Form 8888, you also specify who will own the bonds. That means, you can give paper savings bonds to yourself or to anyone else (as a gift). If you have enough money in your refund, you can buy multiple bonds and, if you wish, you can give them multiple registrations.
Series I savings bonds protect you from inflation. With an I bond, you earn both a fixed rate of interest and a rate that changes with inflation. Twice a year, we set the inflation rate for the next 6 months.
High yield bonds (bonds rated below investment grade) may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk, price volatility, and limited liquidity in the secondary market. High yield bonds should comprise only a limited portion of a balanced portfolio.
We favor high-quality investment-grade bonds relative to riskier lower-rated bonds. That applies to both the taxable and non-taxable arenas. Valuations are compelling in high-quality municipal bonds in the intermediate to longer maturity range.\"
The table below summarizes what I found when dividing all months over the past four decades into four groups, according to their real interest rates. Regardless of whether I focused on bond returns over the subsequent 1-, 5- or 10-year periods, bonds earned higher inflation-adjusted returns when real rates at the start of those periods were higher. This pattern is significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine.
Bonds are generally considered a less-risky asset than stocks. Still, they haven't been immune to the selloff investors experienced this year that has sent all three major stock market indexes tumbling into bear markets. The Federal Reserve has been raising interest rates to battle high inflation and most recently hiked rates by three-quarters of a percentage point for the third time in a row. The Bloomberg Global Aggregate Index of government and corporate bonds is down more than 20% since the beginning of the year, signaling the global bond market has entered a bear market for the first time in around three decades.
There is a wide variety of types of bonds, with different payment timelines and minimum investments. Most bonds offer fixed coupon rates. But the interest on the Series I Savings Bond or I bond, for example, is made up of both a fixed rate and an inflation rate, which can change every six months. The duration on bonds vary, too, with most falling between one year and 30 years.
But when bond prices move down, bond yields move up. The reasoning comes down to supply and demand within the bond market. When there is less demand for bonds, new bond issuers have to offer higher yields to attract buyers. Meanwhile, bonds with lower yields that are already on the market become less valuable by comparison.
\"It's a bad year if you held bonds starting on January 1st,\" explains James J. Burns, certified financial planner and president of JJ Burns & Company. \"It's a great year for someone who's got cash to invest.\"
And actually moderating how much risk you take is much easier in bonds than in stocks: If you want to have a low-volatility bond portfolio, you buy bonds with shorter durations and higher credit quality, Plecha explains. (Credit quality refers to how likely a borrower is to repay their debt. Shorter-term bonds are less volatile because you're not locking up your money as long.)
Typically when you're young, financial advisors tend to say you shouldn't have a lot of money invested in fixed income. Instead, you may want to establish an emergency fund first, and then invest money you won't need in the near future in stocks. But as you get closer to retirement, you likely want to invest in bonds because they allow you to preserve capital and have more predictability.
If you're far from retirement but have short-term goals, bonds may also make sense, she adds. For example, if you're planning to pay for a child's education, you might want to buy some bonds that mature during that child's school year so you can use that money to help with the bill. The same goes for plans to buy a home anytime soon.
\"If someone is really trying to stretch for something high yielding really because it looks shiny, that may be where there could be a bit more trouble,\" says Adam Shealy, senior investment analyst at Homrich Berg. While higher-yield bonds may also see higher returns, there is greater risk that the issuer will default on the debt.
There are many different ways to buy bonds, and the process is sometimes (but not always) as easy as buying stocks or ETFs. You can head to TreasuryDirect.gov to buy bonds directly from the federal government. Money has a whole guide to buying I bonds this way.
In 2022, the Bloomberg Barclay's US Aggregate Bond Index, which represents the vast investible universe of US bonds, is set to do something it has never done before: lose value for the second year in a row.
However, as 2023 begins, bonds look poised to once again deliver their traditional virtues of reliable income, capital appreciation, and relatively low volatility. For the first time in decades, bond yields are high enough that income-seeking retirees can use them to help support a 4% withdrawal rate from their portfolios.
Because bond prices typically fall when interest rates rise, bond markets have long been sensitive to changes in rates by central banks. But they are also influenced by other factors such as the health of the economy and that of the companies and governments that issue bonds. Since the global financial crisis, though, the interest rate and asset purchase policies of the Fed and other central banks have become by far the most important forces acting upon the world's bond markets. In 2022, the focus of their policies shifted from supporting markets to trying to fight inflation and bond markets reacted badly.
That means angst about how interest rates might affect bond prices shouldn't obscure the fact that the return of rates to historically normal levels may present a long-awaited opportunity in bonds for those who seek income and principal protection. For years, as Managing Director of Asset Allocation Research Lisa Emsbo-Mattingly puts it, \"The Fed had been financially repressing savers, especially retirees.\" Now, higher rates mean that retirees and savers may be able to earn attractive returns without taking much risk in 2023 and beyond.
Not only are yields up, prices of many high-quality bonds are down as a result of the 2022 selloff. That means opportunities exist for those with cash to buy relatively low-risk assets at bargain prices even as they pay yields that are higher than they have been in decades.
Emsbo-Mattingly expects the Fed to continue to raise the federal funds rate further until it has an impact on