Analysis of bonds: overview and market forecasts

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Bonds are one of the most conservative investment instruments. Their profitability is low, but guaranteed. Very often, novice investors, either cautious and limited in funds, stock market players include bonds in their portfolio, or are completely limited to them. A recent analysis of bonds shows that an increasing number of people are interested in the financial possibilities of this instrument. It is great to navigate the bond market and get the maximum guaranteed income from their possession is real. The main thing is to have a solid strategy and have all the information.

How the bond market works

A bond is a debt security. The principle of operation of this paper for us, as investors, is extremely simple. The state or enterprise, depending on the type of bond, issues a certain number of debt securities in order to raise funds. For an issuer, i.e. an entity issuing bonds, this isbetter than a bank loan. Bonds enter the stock market and are sold to investors. Each market participant has the right to buy the number of bonds he needs at their face value. When buying, we know exactly when and with what percentage the bond will be redeemed.

The bondholder has the right to resell the security to other market participants at his own discretion. He also receives the so-called coupon income for the entire period of holding the bond. A coupon is akin to interest on a deposit, which is why bonds are often compared to deposits. However, the return on holding a bond can be significantly higher than on a deposit.

Bond yields

The most interesting thing in the securities market is that with the right investment strategy, any instrument can be turned into a highly profitable one. Bonds are no exception in this regard, the analysis and strategies of which reveal a lot of options for long-term capital gains. If we talk about the percentage, the yield of bonds ranges from 6 to 18% per annum, depending on the type of paper. Corporate bonds show the highest return, while government bonds show the lowest.

What makes up bond yields?

1. The difference between the purchase price and the face value at which redemption is made. The bond is traded on the securities market throughout its life. It is not uncommon that paper can be bought at a price below par. Then the investor receives this difference on his ownaccount.
2. Coupon income. The size of the coupon is known to the investor in advance and remains unchanged throughout the life of the paper. The lowest coupon for federal loan bonds. Corporate bonds set the coupon at their discretion. Sometimes, in order to attract a large number of investors, private companies declare a rather high percentage of coupon income. It should be understood that in this case, the risk of depreciation also increases.

So, the analysis of bonds shows a direct dependence of the yield of a particular security on its type. It's time to figure out what the classification of bonds is.

Government bonds

The most common classification is by the type of issuer, that is, the organization issuing the paper. The largest and most reliable issuer of bonds is the Ministry of Finance. Such securities are called federal loan bonds (OFZ). They have the highest reliability, are practically not subject to fluctuations in market prices. But the coupon income on these securities is almost equal to the interest on deposits of large central banks.

There are also municipal bonds. These are papers issued by the constituent entities of the Russian Federation. For example, you can buy bonds of the area or region in which you live. Here, the market price can already give small fluctuations, depending on the term of the bond and the state of the economy in a particular region. The authorities of the subject also have the right to establish the coupon income at their own discretion. It can be either higher than the OFZ, or equal to it.

Bonds of privatecampaigns

Corporate bonds are the most interesting in terms of investment. Their coupon income can be several times higher than the income on OFZ coupons. But as the reward grows, so does the risk.

Corporate bonds are issued by legal entities: large corporations, banks, etc. Organizations guarantee the return of funds borrowed on securities with their property. The larger and more stable the campaign, the more reliable its bonds. However, the analysis of bond yields often revealed cases when investors managed to earn money on bonds of small companies developing in promising areas. In order to successfully implement such a risky investment strategy and invest in securities of little-known campaigns, you need to have excellent financial instincts and remarkable abilities for analysis.

Maturity dates

There is another criterion by which bonds are often classified and analyzed - their maturity. According to this principle, securities are divided into:

• short-term;
• mid-term;
• long-term.

The first and second are the most common among both issuers and investors. In terms of this classification, the Russian securities market differs significantly from the Western one. Our short-term securities have a maturity of 3-6 months to a year. Medium-term - 1-5 years, long-term - more than 5 years. In the West, these terms are much more impressive. This is due to the greater stability of the Western economy. In Russia, no investor will riskpurchase a bond of any company with a maturity of 30 years. Even 5 years is too long for our constantly changing economic realities.

Investment strategies

How is it possible, without taking active actions in the stock market, to earn good interest? The bond market, with a wide variety of analyzes and strategies, offers several options to choose from.

Strategy "Ladder" involves the purchase of the least risky securities in stages: a package of bonds with a maturity of 1 year is bought. At the end of the year, the investor receives coupon income and returns the invested funds. The entire amount of the proceeds is used to purchase bonds with different maturities from 1 to 5 years. Thus, money, constantly working, brings a good total income. At the same time, the investor practically does not risk his funds, he does not need to constantly monitor the stock market or the price fluctuations for certain securities.

The Bullet strategy, on the contrary, requires constant work with the market and involves the purchase of bonds at different times on the most favorable terms. That is, the investor must track when the market price of the paper is as low as possible. Thus, a portfolio is formed of bonds with the same maturity, but purchased at the most favorable market price at different times. Here, the benefit is not so much due to coupon income, but due to the difference in the purchase price and the redemption price.

Which is better?

Many novice investorsthe same question often comes up. They ask, having familiarized themselves with all the possibilities of the stock market and having analyzed it: stocks and bonds - which is more profitable?

There can be no definite answer to this question. It all depends on the investor himself, his ability to navigate the securities market and the financial market as a whole, his willingness to take risks for the sake of greater profits, the amount of free time that he is willing to devote to trading. The higher the financial literacy and the more opportunities to follow the market, the more opportunities to quickly and earn a lot on constant stock speculation. Bonds are designed for a longer term. Therefore, they are preferred by more conservative investors. However, the analysis of bonds, like any other securities, does not tire of confirming the main truth of investing: you should work with all available tools, the main thing is the right strategy.

What to read

A lot of books have been written about the bond market and its possibilities. One of the most popular is Frank Fabozzi's Bond Market Analysis and Strategies. This book has long been highly respected in the circle of financiers. It even builds lectures on financial literacy from many leading business schools. It will also be good for those who are not professional financiers, but want to learn how to make money on the bond market on their own. The contents of Fabozzi's book "Bond Market Analysis and Strategies" will help you understand in detail the types of these securities and choose the most suitable one.strategy for dealing with them.

Bond market forecasts

Forecast on the bond market is always directly dependent on the discount rate of the Central Bank. As soon as the Central Bank rate starts to move up, bond yields rise. As the key rate starts to fall, bond yields immediately drop as well. Due to the fact that the Ministry of Finance continues the trend of reducing the key rate, in the near future the bond market expects the same consistent decrease in yield.

Despite this forecast, bonds are still a popular and attractive investment vehicle. They consistently compete with bank deposits.