Bonds saw their worst performance ever in 2022 – so it’s understandable if your confidence in the asset class isn’t at its highest. But the tide is shifting. We’re in a new economic regime, which means a new set of investment opportunities.
Bond prices tend to rise when interest rates fall (or are expected to fall). Or simply:
So fixed income assets should see less pressure as central banks start slowing or pausing their rate hikes this year. Want to hop on the bond bandwagon? Here’s how bonds can fit into your portfolio in 2023:
Provide diversification: As part of a balanced portfolio, bonds can offset some of the volatility from stocks and reduce overall portfolio risk.
Preserve capital: That lower risk also means that bonds can – in general – help preserve the value of your initial investment.
Generate capital: Bonds provide investors with income via periodic interest payments, which can help pay for your bills, groceries, or anything else!
Elevated bond yields currently make the asset class especially attractive from an income generation standpoint.
Short-dated US government bonds currently yield more than 4.5% p.a. That’s a compelling rate of return for an effectively risk-free asset. Within our Flexible Portfolios, you can invest in cash equivalents offering exposure to US government bonds with 1-3 months remaining to maturity.
Longer-duration bonds are seeing positive real yields versus expected inflation, which means investors get returns that beat inflation. If you’re looking to add targeted exposure to bonds, our Flexible portfolios offer a pre-made Passive Income template (with a 99% allocation to bonds) that gives you regular dividend payouts.
Explore our Passive Income template
US employment saw stunning growth in January, with nonfarm payrolls up 517,000. This figure was nearly triple the Bloomberg consensus forecast of 189,000 and surpassed even the highest estimate of 320,000. That pushed the jobless rate down further to 3.4% – the lowest reading since May 1969!
What does this employment data mean?
The US jobs market is still very tight, which means that inflationary pressures may stick around for longer than expected. But take it with a grain of salt: The elevated reading was partly due to seasonal factors and data revisions.
And we know that high inflation is bad news for the Fed…
In order for the US central bank to start cutting rates, inflation needs to cool more substantially. And for that to happen, the labour market needs to cool as well.
Earlier this week, Fed Chair Jerome Powell reiterated that interest rates may reach a higher peak than investors expect if the labour market doesn’t show signs of slowing. While the Fed may be slowing rate hikes and soon pausing, interest rates could stay high for some time – likely through year-end, and possibly into 2024.
When investors consider buying bonds, they want to understand the return they can expect to get from holding the bond. Two measures of a bond’s yield are its coupon rate and its yield to maturity. How do these differ?
A bond’s coupon rate is the annual amount of interest an investor will receive from holding the bond. This rate doesn’t change during the bond’s lifetime. For example, if a bond’s face value is $1,000 and it pays out $20 once a year, its coupon rate is 2%. It’s useful to know if you’re holding the bond till maturity.
Yield to maturity
A bond’s yield to maturity (YTM), on the other hand, rises or falls depending on the bond’s market value and how many payments remain before its maturity. The YTM is the percentage rate of return that an investor will get if he or she holds the bond until its maturity date. It’s useful for understanding a bond’s value if you’re buying it on the secondary market (or selling before its maturity).
Want to invest according to your beliefs? Say hello to Ethical Investing! You can now customise your portfolios with 2 new assets. They’re both available in our Flexible Portfolios in the StashAway app.
You can now invest in:
iShares MSCI World Islamic UCITS ETF, which will give you worldwide exposure to global companies like Microsoft, Exxon Mobil, Johnson & Johnson, and others. (Under International Equities -> Ethical Investing).
iShares MSCI USA Islamic UCITS ETF, which will provide direct investment to a broad range of US-based companies like Tesla, Procter & Gamble, Pfizer, and others. (Under US Equities -> Ethical Investing).
Disclaimer: The ETFs in these sub-asset classes are offered as Ethical Investing ETFs by their Fund Manager. StashAway is not providing Shariah-compliant investment advice or investment products.
StashAway Malaysia Sdn Bhd (201701046385) is licensed by the Securities Commission Malaysia (Licence eCMSL/A0352/2018).