There was a time not so long ago when U.S. Savings Bonds were viewed as perfect gifts for young children and young married couples, and when everyone from college students to grandmothers tried to buy at least one bond a month! That just doesn’t happen any longer.
Bonds issued by the U.S. Treasury yielded over 10% in the early 1980s, but their return has steadily fallen ever since. Today’s rate is currently under 2%, and has been slightly fluctuating around that number since the 2008 economic crisis. Sadly, this is a big change from 30 years ago.
As older Americans – including veterans – anticipate living longer and staying more active in retirement, maximizing retirement income is vital. So, are bonds still a good option?
What About Bonds?
A bond is essentially nothing more than a loan made in return for a promise that the principal will be repaid over time, at a specified interest rate. While bonds are traditionally viewed as less risky than the stock market, stocks tend to perform better than bonds over long periods of time. However, many investors don’t have the time or the patience for the stock market, and want a less risky way to provide for retirement income.
Bond maturity periods vary from short term to 30 years or more. The bond’s face value is known as its “par value” and the interest rate is termed the bond “coupon” or “coupon rate.” Stable corporate bonds, U.S. Treasury bonds and tax-free municipal bonds have traditionally been viewed as low-risk, long-term investments designed to provide supplemental retirement income and protect principal.
In today’s volatile economic climate, however, it is increasingly difficult to view bonds, no matter what type, as safe-haven investments. Bonds purchased individually by investors, generally held until maturity, may still provide stable income and add diversity to an investment portfolio. But interest rates are low these days and are not expected to rise much in the foreseeable future. Bond fund prices fluctuate and principal is subject to value erosion.
There is a pretty bleak picture of today’s bonds: more than $13 trillion in bonds are producing negative yields, U.S. Treasuries are being increasingly priced at record lows, and corporate bonds are at the lowest levels since the early 1960s. Furthermore, even long-term bonds are frequently disproportionately affected by near-term financial factors. Long-term bonds are priced at levels that don’t reflect their intrinsic value, making them an expensive investment vehicle for those seeking safety and stability.
Bonds at times may actually bear more risk than other investments, according to a recent Wall Street Journal article that describes how a German 30-year bund, considered “rock solid,” lost one fourth of its value in just two months. For bonds with long maturity periods, that represents a decided risk for investors who must sell prior to maturity. In addition, Business Insider reports that that the volume of negative-yielding bonds is growing at a staggering rate, indicating investors’ insecurity regarding the global financial market.
If you are anxious about a slow economy and international turmoil, a well-thought-out investment strategy is much more effective than hiding cash under the mattress. Yet, bonds may not be the best option as their return is ever decreasing. Furthermore, if you don’t make enough to keep up with inflation, then it becomes a negative yielding investment regardless. Rather, make sure to supplement any veteran retirement benefits with tangible investments that have proven track record of withstanding market fluctuations, so your retirement will be secured in case the world plunges into another economic depression.