Bonds are debt instruments packaged up and traded as securities. They are effectively loans that can be issued by companies, municipal authorities and sovereign governments and can be purchased in return for a twice annual coupon or yield for the duration of the loan plus, of course, the repayment in full of the principal amount of capital outlay.
Bonds are generally less volatile in price action than equities and those issued by corporates offer a significant advantage over equities insofar as if an issuing company goes bankrupt, the bondholders (creditors) of that company are first in line to receive the proceeds of liquidation whilst equity holders can often end up holding little more than worthless stock.
Monex Financial generally recommends bonds issued by sovereign governments and blue chip corporates although the former have attracted some criticism of late. Several Western governments have resorted to a policy known as quantitative easing or the monetization of debt in order to boost their economies. Put simply, these governments need to borrow excessive amounts of money in order to fund the various bailout and stimulus packages they deployed. Basically, the governments issue the debt and the countries’ central banks create the money to buy the debt back from the markets.
We believe that the consequences of these policies have yet to manifest themselves but, in the fullness of time, our misgivings will be vindicated.