How to Invest in Bonds in September 2022
Figuring out how to invest in bonds? With a recession potentially on the way, some investors are researching how to buy high yield bonds as a way of diversifying their portfolio.
Below we review the best way to invest in bonds depending on your investment goals. We look at how to invest in a bond individually. We look at how to spread risk by buying many bonds at once as part of a bond Exchange-Traded Fund (ETF). And overall we outline what types of bond exist as well as what pros and cons they offer.
How to Invest in Bonds – 5 Easy Steps
One easy way to invest in bonds is to buy into a bond ETF. Or investors can drill down and pick their own bonds individually. Either way, buying bonds generally takes just 5 simple steps:
- ✅Step 1: Open an account with your preferred broker – Head to the online platform of your preferred broker. To get started, input some straightforward personal details.
- 🔑Step 2: Verification – All regulated brokers must insist by law that investors verify their ID. This is to keep everybody safe from fraud. Provide some proof of ID and address as requested onscreen.
- 💳 Step 3: Deposit – With Interactive Broker, for example, investors may deposit funds into their account via ACH, bank transfer or cheque.
- 🔎 Step 4: Search for bonds – Interactive Broker provides a Bond Search Tool. This is just as well, given there are over 1m bonds on offer! Searching for bond ETFs is easier, as there are far less to choose from.
- 🛒 Step 5: Buy bonds – Before an investor buys any asset, it is important to talk to a professional first. Speak to an Independent Financial Adviser (IFA) or tax professional. When ready, execute your trade onscreen. Usually your broker will be happy to store your asset and, in the future, potentially buy it back.
Where to Invest in Bonds in 2022
Many full-service brokers (Capital.com and eToro being examples) offer bonds as part of Exchange-Traded Funds (ETFs). We look at a few bond ETFs below, as they offer a convenient way to gain exposure to many bonds at once.
But, first, we review one global broker based in the US which offers individual bonds. Buying individual bonds means investors can really focus on achieving their investment goals exactly.
1. Interactive Brokers – Full-service Broker Offering Bond Investing
IBKR is the broker wing of Interactive Brokers Group. The firm is listed on the NASDAQ and handles 2.17m trades every day. Founded in 1977, Interactive Brokers is headquartered in Greenwich, Connecticut, US and employs over 2.5k staff across 14 countries.
IBRK has investors covered whether they want to invest in stocks, commodities, options, futures, currencies, mutual funds, ETFs and, of course, bonds. (Contracts-For-Difference are also offered).
With IBKR’s Bond Search Tool, investors can search over 1m bonds globally and compare yields on:
- 26k corporate bonds
- 1m+ municipal securities
- 21k certificates of deposit and non US-sovereign bonds
- A full selection of US government securities
The broker charges no mark-ups or spreads on bonds, but does offer a commissions system. Commission depends on the type of bond and how much is being traded, with minimum commissions of $5 on Treasury Bonds, and $1 on corporate and municipal bonds.
Importantly, investors with IBKR can rest assured that this outfit is properly regulated. In the US, regulation is covered by FINRA, NYSE, and the SEC. In the UK, the FCA oversees operations.
| Approx Number of Bonds | 1m |
| Pricing System | Commission only: no spreads or mark-ups |
| Payment Methods | US: ACH, bank wire, online bill pay or paper cheque |
| Non-Trading Fees |
No inactivity fees or account minimums for individual accounts |
Pros
- Free IBKR smartphone app
- Free demo account for stocks and other assets
- 1m bonds to trade
- Commission only on bond trades
- Full range of investable assets
- Accepts 24 currencies
- Comprehensive help guides with videos
Cons
How Does Investing in Bonds Work?
Investing in bonds works initially in the same way as investing in stocks.
The investor must:
- Pick either an individual bond, or a group of bonds in a bond fund or ETF.
- Sign up with a broker that sells this bond/ETF.
- Get their ID verified with the broker.
- Deposit funds.
- Instruct the broker (via their desktop or smartphone investing app) to buy the bond.
Then the broker will usually be happy to hold onto the bond on behalf of the investor. The investor will then receive coupon payments (the ‘nominal yield’) from the bond at regular intervals. These will be paid into their brokerage account (or re-invested automatically, depending on the type of bond).
How Do Bonds Work?
Bonds are essentially IOUs offered by governments, municipalities and corporations.
Simply put, the idea is that the issuer needs to raise some money. The investor agrees to pay the issuer some money right now. In return, the investor receives a bond from the issuer to pay regular interest payments on the money lent – as well to pay back the bond’s face value when it reaches maturity.
- Bonds come with different timespans, including 10, 20 and 30 years.
Risk is a key determinant of the price and yield of bonds. Bonds are rated accorded to two types of risk:
1) Credit Risk
This is the risk that the bond issuer will default on the yield payments.
The higher the risk, the worse the risk rating and the higher the yield offered by the bond.
Bonds are given a credit risk rating by a credit ratings agency like Moody’s or Standard & Poor’s.
- These ratings runs from a AAA rating for the safest bonds to C for the riskiest bonds (called ‘junk bonds’.)
- Thanks to its wealth and size, the US Government, for example, is considered to offer zero credit risk. Thus its bonds are rated AAA.
2) Interest Rate Risk
This is the risk that interest rates will rise and make the bond less valuable. How does this work? Well, when a new bond comes onto the market, its nominal yield – ie. the amount it will pay out over time – is determined by current interest rates. So, if interest rates are high, new bonds will reflect that and offer high yields for the future. The result of this is that existing bonds on the market offering lower yields will be, naturally, worth less.
How to Find the Best Bonds to Invest in
The first issue with finding suitable individual bonds is finding a suitable bond broker.
US investors can use an authorized search page to find brokers regulated by the influential Financial Industry Regulatory Authority (FINRA). Investors can enter the name of any broker and see whether it has FINRA’s backing. It is always sensible to invest with a regulated broker.
From the image below we can see, for example, that Interactive Brokers (reviewed above) is authorized by FINRA.
Many popular online brokers offer bond ETFs. These are often index funds – shares of which the investor may trade freely as if they were company shares.
What Types of Bond Are There?
There are three main types of bond:
- Government Bonds
- Municipal Bonds
- Corporate Bonds
1) How to Invest in Government Bonds
Sovereign governments issue debt-based assets of varying types. The US Government, for example, is responsible for issuing $23 trillion of:
- Maturities (which last from one month to one year)
- Notes (which last from 2 years to 10 years)
- Bonds (20 or 30 year duration)
US Treasury bonds are exempt from federal taxation, but subject to state taxation. Their returns generally are not as high as for corporate bonds. But they are less risky.
How to Invest in ‘I Bonds’
‘I Bonds’ are a form of US Treasury bond we look into below. Like TIPS (Treasury Inflation-Protected Securities), I Bonds offer protection against inflation. They are therefore very popular.
2) How to Invest in Municipal Bonds
Professional investors would say that perhaps the best place to buy municipal bonds is with a bond broker. Although municipal bonds are issued by individual US states, they cannot be bought directly from states.
- The price of municipal bonds in the US tends to be driven by US Treasury bond yields.
- Municipal bonds offer lower yields than corporate bonds but also less risk of default.
- The big selling point of municipal bonds is that they are generally exempt from all taxation (although exceptions apply).
- Municipal bonds offer an ethical advantage too. Investing in a municipal bond means lending your local authority money to complete a project, whilst securing a fixed income for yourself too.
3) How to Invest in Corporate Bonds
Corporate bonds offer the highest level of risk but also the highest potential returns. When a company needs to raise money, it may have the authority to issue bonds. The question all investors must answer is: can the company be trusted to make good on the coupon payments?
Usually the highest yields on the market are offered by companies with a high risk of credit default; there is no such thing as a free lunch.
Top fund provider Vanguard reports that default rates currently stand at around 1% for high-yield corporate bonds – ‘well below the historical average of 3.5%’.
How to Invest in Bond Funds
Bond funds are either mutual funds or ETFs which invest wholly, or partly, in bonds. Some track influential bond indices, like the Bloomberg Municipal Bond Index, which offered a tax-adjusted yield of 5.42% in mid-2022 as well as a AA/AA- rating; an attractive combination.
Investors can buy shares in ETFs with full-service brokers. Capital.com, eToro and Interactive Brokers are examples which investors might research for themselves.
5 Popular Bonds to Invest in Right Now
1. I Bonds
I Bonds are issued by the US Treasury. Their interest rate is set to beat inflation estimates.
- The current I Bond interest rate is an impressive 9.62%.
I Bonds are available direct from the US Government’s TreasuryDirect website.
- Maturity: 30 years in all (20-year original maturity, followed by 10-year extended maturity)
- Minimum investment: $25
- Maximum investment: $10,000
- Cashing in: I Bonds may not be cashed in for one year after purchase. And cashing in between years 2 to 5 incurs a penalty of 3 months interest payments.
I Bonds are similar to TIPS (Treasury Inflation-Protected Securities). The difference is in the nature of the inflation protection:
- In the case of TIPS, the price of the bond is adjusted to beat inflation estimates.
- With I Bonds, it is the interest rate that is adjusted.
2. 3i Group Medium Term Notes 1999
This individual corporate bond is offered by the multinational investment company 3i Group, based in London.
As we can confirm from the chart below, the price of this bond has suffered in recent years along with the rest of the international bond market. Currently it is valued at just over £100.
The coupon rate offered is 5.75%. Distributions are paid twice a year.
The bond comes to maturity in December 2032, having been released in December 1999 as part of a total £400m issuance.
The 3i Group is part of the FTSE 100 Index. This bond is therefore not considered as a major default risk – but investors should always do their homework on corporate bond providers, as well as consult their Independent Financial Advisor before purchase.
3. US 30 Year TIPS
This bond is a type of US Treasury bond called a TIPS. TIPS stands for Treasury Inflation-Protected Security.
With TIPS, the price of the bond is adjusted at issuance to aim to stay ahead of inflation. With I Bonds, it is the interest rate which is adjusted.
Bonds like this one with a maturity of over 20 years is called a ‘T Bond’.
The coupon rate of the 30 Year TIPs is 0.125%. This means that, at issuance, the bond was configured to pay 0.125% interest over the course of its life. This low interest rate is not unusual for T Bonds, because of the supreme credit rating of the US Government. Investors can be sure, in other words, that they will receive their payments – so they are expected to accept lower yields.
Below we can see a chart showing the yield of 30 Year TIPs since 2000.
A convenient way to buy into TIPS like this one is to buy into a mutual fund or ETF that features them – as well as many other bonds.
4. JP Morgan Income Fund (JGIAX)
Issued by US investment bank JP Morgan as a form of mutual fund, JGIAX invests only in bonds. A bond mutual fund is one way of getting exposure to many bonds at once – and taking the headache out of individual bond selection.
- JGIAX has received a rating of 4 out of 5 stars from Morningstar.
- The fund boasts a 5-year average annual return of 2.73%.
- Minimum investment: $1,000.
2,369 bonds are covered in all, with a total worth of $11bn. A full range of credit risk is covered too:
- AAA: 15.2%
- AA: 1.8%
- A: 3.6%
- BBB: 18.8%
- BB: 28.9%
- B: 11.2%
- CCC (and lower): 1.7%
- Not rated: 18.7%
5. Vanguard Total International Bond Index Fund ETF (BDNX)
As a passively-managed ETF, this fund offers a low Expense Ratio of 0.07%. It is a cheap fund to run because it tracks a bond index: the (very wordy) Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged).
Investors should be clear: this broad-based ETF tracks only government and corporate bonds which are issued outside of the US.
Many ETFs on the other hand focus only on US Treasury bonds, such as the iShares 7-10 Year Treasury Bond ETF.
BDNX holds 6728 bonds with an average yield to maturity of 3.67% and an average maturity of 9.3 years. The fund offers a current yield of just 2.13%. Distributions are paid monthly.
Are Bonds a Good Investment?
Bonds are traditionally used as a ‘contrarian’ asset. This means that their value sometimes does the opposite of conventional stocks – which means bonds are used to hedge risk.
Should I Invest in Bonds?
Bonds offer two forms of potential income:
Fixed Income
- Bonds pay out a coupon rate (or ‘nominal yield’) of interest for the duration of their lifespan.
If a regular fixed income combined with low risk is part of your investment strategy, bonds are ideal.
Sales Value
- Bonds can be sold during their lifespan. The new owner will then receive the remainder of the payouts due on the bond.
- The value of bonds fluctuate.
- If inflation or interest rates fall, the price of bonds tends to rise.
How are Bonds Taxed?
Bonds are taxed when a) they are sold for a capital gain and/or b) interest payments are received.
- US Treasury bonds are exempt from federal taxation.
- Municipal bonds are generally exempt from federal and state taxation.
- Corporation bonds are taxable at both federal and state levels.
Tax information on bonds and other investments is available online direct from the IRS.
In countries other than the US, regimes vary. But, as with other investment assets, the (very) general rule of thumb is that both capital gains and interest payments will be subject to taxation. Always consult with a tax professional before investing in bonds.
Bonds vs Presale Cryptos – Which is the Better Investment in 2022?
Bonds are a very particular type of asset. They focus on fixed income over the long-term, with some resale value. If an investor wants to grow a pile of money (capital growth), bonds are not necessarily the best choice.
When it comes to capital growth, few assets can compete with crypto as long-term investments (and short-term). And crypto offer the most potential for profit when they are in their presale phase.
‘Presale’ means that a crypto has yet to be listed with one of the popular altcoin exchanges in its Initial Coin Offering (ICO).
- ‘ICO’ to crypto is what ‘IPO’ (Initial Public Offering) is to stocks.
Available right now as one of the best crypto presales is one of the most promising cryptos: Tamadoge (TAMA).
Remember Dogecoin, the doggy meme crypto that took 2021 by storm? And Shiba Inu (SHIB) which followed? Tamadoge is billed as the next crypto to take up the doggy theme and rock the markets. And that is because TAMA is more than just one of the best meme coins. Tamadoge matches the cutesy appeal of canine meme crypto with real utility – it is set to be one of the best video game cryptos and meme coin rolled into one.
The Tamadoge metaverse is lining up to host one of the best Play-to-Earn games out there. Players compete to earn in-house crypto TAMA with their own unique NFT virtual pets, which they can train and accessorize. Drawing on the success story of Tamagotchi virtual pets, Tamadoge adds a modern twist of compelling play-to-earn mechanics and NFT trading.
Crypto TAMA is at the centre of the ‘Tamaverse’. And investors looking for the hottest crypto right now can get their hands on TAMA before the market gets wind of it.
Tamadoge’s $2m Beta presale sold out way ahead of time. Right now TAMA is still in its presale phase before its confirmed listing on CEX LBank and then Uniswap. The price goes up as the presale continues. So it pays to get in as early as possible.
And thanks to auditing by Solid Proof and Coinsniper, investors can relax when it comes to Tamadoge being above board. This is no rug-pull scam. TAMA is ‘legit’ and, what’s more, billed to be the next Dogecoin.
To buy Tamadoge investors just need to take four steps:
- Get yourself a MetaMask or Trust crypto wallet.
- Purchase some Ethereum (ETH) or Tether (USDT) to trade.
- Connect your wallet at the Tamadoge platform.
- Reserve your TAMA.
| Min Investment | 1,000 TAMA (∼$10+ gas fee) |
| Max Investment | NA |
| Purchase Methods | ETH or USDT now; fiat currency soon |
| Blockchain | Ethereum (ERC-20 token) |
| Presale Ends | Q4 2022 |
Conclusion
Above we have aimed to provide a beginner’s guide to investing in bonds.
Despite their poor performance over recent years, bonds are always worth looking at as a way of diversifying an investment portfolio.
And the same can be said of the best emerging cryptos. Crypto are at the opposite end of the risk/reward spectrum than bonds. So sensible investors only commit 1-5% of their portfolio to crypto.
If high growth potential is the objective, then a presale crypto like Tamadoge is particularly attractive, as it could well be one of the next crypto to explode. Just be sure to only commit what you can afford to lose with any financial asset!
Tamadoge (TAMA) – Next Big Meme Coin
- Presale 80% Sold Out – $13M Raised
- Deflationary, Low Supply – 2 Billion
- Move to Earn, Metaverse Integration on Roadmap
- NFT Doge Pets – Potential for Mass Adoption
- Play to Earn Utility – Rewards Token
FAQs
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Disclaimer
It is vital to always invest responsibly in awareness of all risks involved. Markets can be extremely volatile, so you should conduct extensive research before investing. Our site provides regular updates and diligently verifies all platforms it recommends, but you should form your own opinion and invest only what you can afford to lose. There is never any guarantee of a return on investment.
