As the financial crisis continues, many investors are questioning where to put their money. Bonds typically have been thought of as a favorite for an older generation looking for more stable, less risky investments; however, in this economic climate, bonds, generally, have proven appealing across demographics. Three big reasons: first, savings account interest rates pale in comparison to bond earnings; second, stocks can be unpredictable, especially in the current economic climate; third, by investing in bonds early on, individuals can generally rely on an investment with a predictable lifespan and payment schedule.
An article in SeekingAlpha* reiterates this point, but reminds buyers to think carefully about which bond they purchase: “Bonds and other high-income securities can create an anchor during rough seas – just don’t pay for a gold-plated anchor when stainless steel will serve you better.” Just as in any investment, buyers must think carefully about which bond they purchase. While no investment has 100% guaranteed safety, bonds can provide some financial security in an otherwise unstable market.
In this tumultuous economy, many investors seek transparency and easy-to-use platforms—Zions Direct’s online platforms offer just that. With Bonds for Less and Zions Direct Auctions, investors have considerable variety to carefully choose which bonds are right for them while paying little to nothing in brokerage fees when purchasing these securities.
*Shaefer, Joseph L., “Looking to Invest in Bonds in Troubled Times? Caveat Emptor!”, SeekingAlpha, seekingalpha.com/article/132194-looking-to-invest-in-bonds-in-troubled-times-caveat-emptor.
Ok, so where do you hide in a financial environment like we’re in? Bonds? I’m not sure!
Welcome to the era where no where is safe. U.S. Treasuries have probably been the bonifide location of ultimate security over the decades. (But that was also in an era of more fiscally responsible banking system, government and Federal Reserve). Times are now different. Herein lies the problem:
What if interest rates rise. You see bond prices are inversely proportional to their yield (interest rate). Thus for an investor to buy long term bonds, they’d be betting on long term rates holding or better, dropping. Otherwise they’d have to hold til maturity if the interest rates rose. Why would anyone buy a 10 year bond at 3.65%? Herein is the next problem:
Interest rates are already very low and in fact the whole interest rate structure has been falling since the 1981 peak….so at some point its going to reverse. The only way for interest rates to fall is if the economy worsens such that money flows to the perceived safehaven of the U.S. Treasury. Of course that would be at the expense of the stock market…..definitely a possibility.
On the other hand there is the real threat of inflation due to the massive government stimulus, spending, and bailouts. The money supply has shot up, its just that this money isn’t being loaned out or borrowed, thus it sits dormant. There is the risk of some serious inflation going forward. (not good for bonds)
And on top of that, what if the U.S. loses its AAA bond rating in the future due to the massive government deficits coupled in with needing to borrow even more as the SS and medicare entitlements increase?
Or what if the foreigners start selling U.S. dollar denominated debt let alone stop buying our debt causing interest rates to rise. These are real issues that are likely to happen at some point and not good for bonds.
At some point the interest rate down channel that has been in place for 28 years is either going to continue a little further down if we have a deflationary depression or it is going to reverse if we have a hyper inflationary depression.
So where to hide? I’d just pay off debts and not worry about where to invest. It’s a real conundrum.
Charles,
We have forwarded your question to a member of our investment center who will be in contact. We encourage anyone with more questions about buying bonds to contact Zions Direct at 1-800-524-8875.
-Russell