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Investing In Bonds In 2011

Investing In Bonds In 2011 – What You Need to Know

Investing In Bonds In 2011Investing In Bonds In 2011 is more complicated than usual because investors who were spooked 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 during 2011.  Making the situation even more complicated is the fact that municipal bonds and municipal bond funds are currently trading at depressed levels due to concerns about municipal bond defaults.

What this all means is that Investing In Bonds In 2011 is not the same as investing in bonds during a typical economic period with moderate to robust economic growth.  In 2011, an investor’s bond trading strategy will be influenced by the type of bond one is contemplating investing in and their investment strategy and goals.

Investing In Bonds In 2011 – Investing Strategy Depends On The Type of Bond

Investors often seek out highly rated bonds for the safe and secure returns on principal that highly rated bonds pay out as interest payments.  Bonds are rated by major rating agencies such as Standard and Poors and Moody’s.  Bonds that are rated BBB- and above are considered investment grade bonds.  Investors who put their money into highly rated bonds face little risk of losing the principal invested due to a default on interest payments by the bond issuer.  The risk of bond default decreases with higher rated investment grade bonds, with AAA being highest rated and least risky bonds.  The trade off for investors is that the less risky the bond, the lower the interest payment, due to the higher demand for less risky bonds and the lack of a risk premium.

In normal times, the principal invested in highly rated bonds and bond funds is not considered to be at risk, and the risk of principal loss is not factor into an investors decision to buy highly rated bonds and bond funds.  However, Investing In Bonds In 2011 is different than bond investing is in normal times because highly rated bonds and bond funds are trading at elevated prices in 2011 due to all the buying interest from investors during the preceding three years.  Once the bond market returns to a more normal trading level, sometime after 2011 when the economy makes a sustained economic recovery, the highly rated bonds and bond funds will lose some of their principal as investors sell, perhaps as much as 20%.

Due to the low interest rates and the potential for loss of principal in investment grade bond investments, Investing In Bonds In 2011 means investors need to look at junk bonds to earn substantial interest payments and municipal bonds to earn modest interest payments.

Junk bonds provide significantly higher yields than more highly rated investment grade bonds, due to the higher risk of default associated with issuers of junk bonds.  Investors demand higher yields from junk bonds in exchange for assuming a higher risk of default.  However, this trade off may be worth it to bond investors Investing In Bonds In 2011, since junk bonds offer attractive interest rates that are not available elsewhere.  Junk bonds also have little risk of principal loss, if they are brought via a junk bond mutual fund or Exchange Traded Fund (ETF).  These funds spread the risk out and avoid junk bond defaults.  Unlike investment grade bonds, junk bonds and junk bond funds are not trading at a premium in 2011, so as long as an investor avoids the principal risk associated with owning individual junk bonds by buying junk bonds via a mutual fund or Exchange ETF, their principal invested will be relatively safe.  For more information about junk bonds, see:  The Junk Bond Market Offers High Yield Returns.

With the potential for appreciation of the principal invested, Investing In Bonds In 2011 is different than normal times in the municipal bond market.  Because concerns have been raised regarding potential defaults in municipal bonds, as local, county, state governments struggle with fiscal challenges due to the 2008/2009 recession, bond funds that invest in municipal bonds are trading at depressed levels in 2011.  A sustained economic recovery after 2011 should cause municipal bonds and municipal bond funds to increase in price, thus providing an increase in the principal invested in municipal bonds and municipal bond funds.  It should be noted that if the economy goes into another severe recession, funds invested in municipal bonds could fall substantially if defaults in municipal bonds occur on a widespread scale due to cash flow problems at local, county, and state governments.  For more information about municipal bonds, see:  Municipal Bonds Offer a Safe Way to Earn Tax Free Income.

Investing In Bonds In 2011 is very different than a typical year, and therefore, investors need to look closely at what kind of bond or bond fund they are thinking of investing in during 2011, and what market forces are impacting the bonds and bond funds they are considering investing in.

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