As we approach inflation levels unseen in a decade, bonds are slowly losing their appeal. Once revered as one of the core holdings in any investment portfolio, inflation has made bonds look unappealing. Bonds are nothing more than debt, with a fixed maturity most of the time. Inflation has been rampant since the end of 2020, and poses perhaps the biggest threat to retirees’ savings. Bonds have a staple in the investment industry, and were once viewed as the safest investment around. Not anymore, as many bondholders are watching their purchasing power evaporate with persistent inflation.
Retirees are the most affected
When you reach retirement you no longer want to take any risks, and invest in things that can make you lose money. You want stable income sources that ensure you can keep the same lifestyle you had before. The value of stocks might decrease, but bonds assure investors that their principal is returned.
Bonds were perhaps one of the most useful tools for retirees. They provided income and downside protection, but not anymore. Today, treasuries offer a modest interest, and when you account for inflation, you basically end up losing money. This has also been one of the reasons why the stock market has been at all-time-highs. As investors are afraid to allocate their capital towards money losing bonds, most of them end up taking a considerably higher amount of risk in search for a better yield.
There are several ways around this problem, but none of them are entirely risk-free. One of the alternatives has been allocating funds to corporate bonds. Some of these corporations are highly well managed and they are sure to pay the coupon on the bonds you hold. Although this has been an interesting approach, most of the yields have also been fairly low. Then there are junk bonds, which usually tend to have a much higher interest. In essence investors get paid a higher interest, whenever the possibility of default is higher. Rewarding investors that take more risks. Even junk bonds today have a low coupon rate, when measured historically. The reality is that some of the corporations behind these bonds are not so reliable.
Author bio: Value of Stocks is an independent financial information provider. Focused on analyzing stocks with a value investing approach. Our main goal is to help investors make better investment decisions.