Best Bonds to Buy Now: How to Invest in Bonds in 2023
Bonds are getting a lot of attention from investors these days, and itâs easy to see why. With inflation soaring and interest rates rising fast, bond yields are as high as theyâve been in years. The yield on the 10-Year Treasury note is hovering around 3.5% after recently topping 4% for the first time since 2008. In such an environment, itâs not surprising that investors have a newfound excitement for bonds.
In addition to that guaranteed return, bonds offer some other advantages in a high-interest-rate environment. For example, if interest rates fall, the price of a bond goes up, and you could make money selling your bond rather than holding it until maturity. Bonds also provide diversification and stability to your portfolio, as they tend to have a low or negative correlation with stocks.
But not all bonds are created equal. There are different types of bonds, such as government, corporate, municipal, and savings bonds, each with their own characteristics and risks. Moreover, there are different ways to invest in bonds, such as buying individual bonds, bond funds, or bond exchange-traded funds (ETFs).
So how do you choose the best bonds to buy now? Here are some factors to consider:
Your investment goals and risk tolerance. Depending on your time horizon and risk appetite, you may prefer bonds that offer higher returns but also higher volatility, or bonds that offer lower returns but also lower volatility. For example, if youâre saving for retirement or a long-term goal, you may want to invest in longer-term bonds that offer higher yields but also more exposure to interest rate risk. On the other hand, if youâre saving for a short-term goal or need liquidity, you may want to invest in shorter-term bonds that offer lower yields but also less exposure to interest rate risk.
Your tax situation. Depending on your income level and tax bracket, you may benefit from investing in tax-advantaged bonds, such as municipal bonds or savings bonds. Municipal bonds are issued by state and local governments and are generally exempt from federal income taxes and sometimes state and local taxes as well. Savings bonds are issued by the U.S. Treasury and are generally exempt from state and local taxes and sometimes federal taxes as well.
Your diversification strategy. Depending on your portfolio composition and asset allocation, you may want to invest in different types of bonds to diversify your risk and enhance your returns. For example, if you already have a lot of exposure to U.S. government bonds, you may want to invest in some corporate or international bonds to diversify your sources of income and reduce your sensitivity to U.S. interest rates. On the other hand, if you already have a lot of exposure to stocks or other risky assets, you may want to invest in some high-quality or inflation-protected bonds to hedge against market downturns or inflation shocks.
To help you find the best bonds to buy now, weâve compiled a list of some of the top bond and bond funds you can buy today. These include:
10-year Treasury Note. This is the benchmark Treasury bond that reflects the marketâs expectations of future interest rates and inflation. It offers a 3.5% yield and has a 10-year duration. It is considered the safest bond in the world and is generally called ârisk-free.â
I Savings Bonds. These are 30-year savings bonds issued by the U.S. Treasury that adjust for inflation. They offer a 6.89% yield that consists of a fixed rate plus an inflation rate that changes every six months based on the Consumer Price Index (CPI). They are exempt from state and local taxes and sometimes federal taxes as well.
iShares TIPS Bond ETF (NYSEMKT:TIP). This is a fund that holds Treasury inflation-protected securities (TIPS), which are Treasury bonds that adjust for inflation. It offers a 7.5% yield that consists of a real yield plus an inflation adjustment based on the CPI. It has a 7.8-year duration and