Money & Career

Corporate bonds and government bonds for safe investments

Corporate bonds and government bonds for safe investments

Author: Canadian Living

Money & Career

Corporate bonds and government bonds for safe investments

These days, it seems, you can't go anywhere without hearing how the markets are doing. But when Peter Mansbridge says that the S&P/TSX Composite Index has fallen 200 points, he's only talking about one part of the market -- the stock market.

There's a lot more to the markets than just equities, though. The bond market is actually far bigger than the stock market and, in many ways, these securities are more important to countries and companies than stocks are. Every investor needs to buy bonds, so here's what you need to know before getting into the market.

What are bonds?
Many countries and corporations raise money by issuing government or corporate bonds, also known as fixed income. Investors essentially lend money to a government or company by buying bonds; the money is then used to help organizations finance various projects.

When the bond's term is up -- they usually come in maturities of one, three, five, 10, 20 and 30 years -- investors get their money back. Think Canada Savings Bonds, but on a larger scale.

Bonds are safer than equities
Bonds are, generally, safer than stocks, which is why most investment experts recommend that we all have some bonds in our portfolios. The safest investments are government bonds, because it's unlikely a country won't pay back its debt obligations.

Corporate bonds are riskier, because a business is more likely to go bankrupt rather than a government, but there are companies -- especially big, multinational ones -- that are nearly as safe as a country.

The riskier the asset, the more money you'll make Because you're lending money by buying fixed income, you get interest rate payments over the duration of the bond's lifetime. That payment depends on the bond's yield. The less risky the asset, the lower the yield and the less money you'll make in interest.

For instance, a two-year Government of Canada bond yields 0.97 per cent, compared to 2.22 per cent for a 10-year bond -- the longer time frame is more uncertain, which is why it's riskier. Government of Canada bond yields are lower than yields from corporate bonds. A six-year Bank of Montreal bond, for example, pays about three per cent. The more risk a company has of defaulting, the higher the yield will be.Bonds in 2011

The bond market today is a bit wacky. Because investors are so nervous about stock markets, many have escaped to safe government bonds, driving yields to their lowest levels in years. That means you're making a lot less buying a government issue today than in the past.

However, some European governments are at risk of defaulting, so their bond yields are sky high. A one-year Greece bond, for example, at the time of writing was yielding 111 per cent. That's not a good thing, because it means investors expect the country to default at any moment.

If you want to find a safer investment with decent yield, consider buying a high-quality corporate bond. Each bond has a rating: AAA is the best, D is the worst. Look for a corporate bond with a A+ rating or above.

How to build bonds into your portfolio
With bond yields so low, some people are wondering whether it's even worth buying fixed income. However, in a market where stocks rise and fall all the time, having some safe, reliable investments is a must. Sure, you won't get a big return, but even if the stock market takes a significant dive, you'll still make money in bonds.

Bonds do have prices attached to them, but if you hold them to maturity, which most people do, you'll get all your money back. So don't worry about price movement.

How much of your assets should you have in bonds? Most experts say younger investors should put 30 to 40 per cent in fixed income and increase that amount as they age. Retirees might want to have 60 per cent of their portfolio in bonds, as it puts their savings at less risk.

However you invest, remember, especially when you're watching the news, that there's more to the market than just stocks. As always, diversity is the best investment strategy.


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Corporate bonds and government bonds for safe investments