At the end of 2022, investors faced volatile financial markets and high inflation. Even with the bumpy ride, financial experts report that 2023 will be a good year for investing. Among the trends this year, the bond market appears to be promising, according to articles published in December 2022 by Forbes and Money Week.
Investors in bonds are essentially lending money to an issuer, for instance, the government, for a certain amount of time. When the time ends, the issuer repays the principal (initial) amount plus interest. Investors can purchase US Treasuries, municipal, high-yield, corporate, and investment bonds.
Bonds are attractive because, for the most part, they provide investors with a steady stream of income. In a portfolio, bonds can tamp down volatility in stocks while generating a return on investment. Some experts consider bonds a good option for people who live off their investment income.
Another advantage of investing in bonds is they hold onto the value of the initial amount invested, which works well for people who need access to their capital in the near future, such as those approaching retirement or preparing to pay for college. The stock market, conversely, experiences volatility, with stock values spiking and then plummeting. In the long term, this activity is not a negative, but in the short term, it may be.
Bond investors also benefit from tax breaks, which helps minimize tax liabilities. Typically, investors are liable for income generated from money market accounts and equities. Municipal bond investors are exempt from paying taxes at the state and federal levels, and US Treasuries investors are exempt from paying taxes on the state and local levels.
As with all investments, bonds carry risks. There is always the risk that a creditor will default on a bond, that interest rates will fluctuate (affecting the bond’s value), and that the bond will be retired before it matures or when investors can cash out. Because bonds have a maturity date, investors cannot cash out until the term ends, making bonds non-liquidity.
Even with these caveats, a December 2022 issue of Money Week reported that 2022 saw higher bond yields (more return on investment), making government bonds attractive, and bank-issued bonds had solid earnings and stability. Forbes mentioned Series I savings bonds being attractive because they protect the principal from inflation. As of November 2022, the savings bond interest rate was 6.89 percent until April 2023. Even with this rate slipping from 9.62 percent in October 2022, it is better than any rate at a bank, brokerage, and many other sources.
Finally, a November 2022 Morgan Stanley article added that while corporate bonds are attractive, they may not be worth the risk in a potentially tight credit market. However, some experts point to other bonds that show promise for those interested in investing in the bond market. A strategist with the financial services company predicted returns in the high single digits through 2023 from German Bunds (bonds secured by the German government), municipal bonds, Italian government bonds, investment-grade bonds (low-risk municipal or corporate bonds), mortgage-backed securities, and European investment-grade bonds.
