Is it still worth holding bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. with interest rates as low as they are? Portfolio Manager Charlie Toole discussed our view on bonds in a low-rate environment in our recent webinar,* Looking Beyond the Election to the Recovery’s Future.
Please enjoy the excerpt below and click here for the full webinar replay to hear more.
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Current interest rates are very low—that points towards low returns in the future. We’ve seen interest rates fall this year to new record lows, but despite those low rates, bonds still act as a safe haven.
I will caution that not all bonds—not all interest-bearing investment vehicles—are safe havens. There are a number of different factors that influence the price movements of a bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates.. One of the most important factors is the credit rating. That is a rating on how financially strong and financially stable the institution that’s issuing the bond is, whether it’s a government or a corporation. The higher the rating, the better the financial standing.
Typically, higher-rated bonds act as a safe haven when stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. are falling. Even in this low-interest-rate environment, I still think that’s the case.
*Webinar recorded after the market closed on Wednesday, October 28, 2020.
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