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Outlook For Bonds In 2012

The Outlook for Bonds In 2012 Is Uncertain

Bonds In 2012The Outlook for Bonds In 2012 is more uncertain than usual because investors who were frightened by the sharp drop in the stock market in 2008 and 2009 have invested their money heavily into bonds in recent years, which has caused highly rated bonds and bond funds to trade at elevated values in recent years.  Clouding the outlook for investing in bonds in 2012 even further is the fact that municipal bonds and municipal bond funds are currently trading at depressed levels due to concerns about municipal bond defaults.  The divergent trends in highly rated bonds and municipal bonds may continue or reverse during 2012, which are important considerations for investors considering investing in bonds in 2012.

The state of the United States economy in 2012 will determine how bonds perform in 2012.  With the European debt crisis ongoing, an apparent slowdown in parts of Asia, and economic indicators in the United States flashing mixed signals regarding the future of the United States economy, there is a lot more uncertainty regarding the outlook for bonds in 2012 than there is during a typical year.  An economic recovery in 2012 will allow bonds to revert to their historical norms, which will affect investments in bonds in 2012.  An economic recession in 2012 will likely continue the already present distortions in the bond markets, as investors continue to buy and hold onto highly rated bonds and bond funds, and municipal bonds suffer from worries about whether the government authorities that issue municipal bonds can pay the interest on the bonds.

Strategies for Investing In Bonds In 2012

With stock markets approaching another bear market, many investors are considering investing in bonds in 2012 for the relatively safe returns that they offer via interest payments.  However, due to the currently skewed valuations and trading levels for bonds and the uncertain economic outlook for 2012, investing in bonds in 2012 is not the typical “safe haven” investment that investors have come to expect from bonds.

The outlook for investing in bonds in 2012 is different than bond investing is in normal times due to the fact that highly rated bonds and bond funds are trading at elevated prices.  Once the bond market returns to a more normal trading level, when the economy makes a sustained economic recovery, the elevated highly rated bonds and bond funds will lose some of their principal, as investors sell their bonds to seek out higher returns in the stock market.  Based on the currently elevated levels that highly rated bonds and bond funds are trading at, they could lose as much as 20% of their principal value in 2012.  Although this might not happen in 2012, since bond investments are long term investments, this must be taken into consideration as a risk factor when buying highly rated bonds and bond funds in 2012.

Junk bonds are an option to consider for those looking to invest in bonds in 2012.  Much of the premium in the price junk bonds has already disappeared, as the United States economy appears to be entering a recession.  Junk bonds typically do not do well during a recession because the companies that issue junk bonds are financially distressed, and their survival and ability to pay interest on the junk bonds that they have issued is a big risk factor that decreases the price of junk bonds and junk bond funds during a recession.  For more information about junk bonds, see:  The Junk Bond Market Offers High Yield Returns.

Municipal bonds are usually considered one of the safest bond investments, due to the issuing local, county, and state government’s ability to raise taxes and cut expenditures to pay interest on the municipal bonds that they issue.  However, investing in municipal bonds or municipal bond funds in 2012, while attractive since many are trading at depressed levels, will carry a much higher risk of default in 2012, if the United States economy is in a recession during 2012.  After years of budget cutting and revenue increases, local, county, and state governments may not be able to pay interest on some of their municipal bonds during a severe recession in 2012.  For more information about municipal bonds, see:  Municipal Bonds Offer a Safe Way to Earn Tax Free Income.

Investing In Bonds In 2012 is fraught with distortions and risks that are not present in a typical year, and therefore, investors need to look closely at what kind of bonds or bond funds they are thinking of investing in during 2012.  Many market forces may impact bonds in 2012, and these market forces must be taken into consideration by bond investors.

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