Saving Bonds - Your Guide To US, UK & Canadian Savings Bonds

savings bonds rates 

saving bonds traderSo far on this site we have looked at the low risk saving bonds rates backed by the government, government agency or bank. Now let's take a look at some of the pros and cons of investing using bonds, and some of the broader issues of bond trading.  Now as everyone knows there is good debt and bad debt, and what bonds provide us with is an opportunity to provide finance for someone else's debt. From an investing point of view, what bonds provide, whether the low risk saving bonds we have already explored, or the higher risk commercial bonds we will look at shortly, is a continuous income stream generated from the interest payments. Indeed many advisors advocate that as you get older, your holding of bonds should increase - we looked at that earlier with our rule of thumb where the older you are, your holding of stocks should be decreasing and your bonds increasing.

So what are the drawbacks with bonds, and what are the principle types available to be traded - let's take a look at the various savings bonds and the associated savings bonds rates.

 

savings bonds

Whilst all bonds essentially raise money in much the same way, there are generally four broad categories of bond as follows :

1. US Treasury Notes

2. Corporate Bonds

3. Government Bonds

4. Agency Bonds

US Treasury notes are issued by the Federal Government as a way to raise finance. Unlike a company, it does not own anything, and therefore cannot issue stocks or shares to raise finance. The only way it can, is either through taxation, or by issuing bonds - in this case called Treasury Notes. The government sells 2, 3, 5 and 10 year notes to investors. Corporate bonds are raised by companies, who generally prefer raising finance this way. Issuing additional stocks to shares dilutes the value of the stocks already in the market which can upset shareholders for obvious reasons. Government and agency bonds are issued by various agencies to raise cash, and we have looked at several of these already. These would include local and other government agencies. All have one thing in common - they have been issued as a way to raise cash and as a holder you become a creditor of the agency or organisation.

saving bonds maturity

The biggest problem with any form of bond investment is the erosion of your capital and interest due to inflation. If you invest $1000 for a ten year period with a 4% interest rate, then the $40 interest will buy you less in the tenth year, than in the first. This is why index linked bonds where part of the interest earned is based on an inflation rate, as we saw with the I Series saving bonds in the US, and the index linked saving bonds in the UK - both have an element which is linked to inflation which protects you to some extent. Another way around the problem is to only buy short term fixed income saving bonds which mature in 12 months. This way you reduce the impact of inflation on your interest.

Having looked at the negative, let's look at the positive and how we could use bonds as part of our investing strategy. Suppose we have $50,000 invested in bonds generating 5% per annum which we would probably receive in two equal amount at 6 monthly intervals. Then rather than pay some bills, or reinvest in more bonds, we could purchase $1250 of stocks or shares and diversify our risk between the low risk bonds and higher risk stocks. These stocks in turn would generate dividends and therefore income of their own. Every 6 months you would be building and developing your portfolio for the long term.

saving bonds funds

Many financial advisors advocate investing in bond funds, rather than directly in saving bonds or investment bonds. In simple terms a bond fund is simply a fund that is invested in a spread of bonds and they are popular for several reasons. Firstly you need less capital to invest, as you are buying a 'share' of the fund, and not the bond itself.  Secondly, as each fund is a mixture of bonds, it is more diversified, so you are automatically spreading your risk. You receive an income stream from the fund which is almost like a regular dividend. Now if all this sounds perfect, there are one or two catches. Unlike most of the saving bonds we have looked at earlier, there is no guarantee that you will get back your original investment. Nor is there a fixed rate of interest - the fund is spread across several bonds all paying various rates of interest which are then consolidated into one rate for the fund which will naturally vary as the various bond rates change.

buying savings bonds

As I have said many times on this site, risk and reward go hand in hand. Now I am not advocating you invest in junk bonds ( very low rating bonds with an extremely high risk of default ) but you can gauge how risky or otherwise a bond is by the rating that it is given. Corporate and government bonds are evaluated by independent  rating services which give a rating to indicate the risk level of the bond. The most common ratings are those provided by Moody, Standard and Poors, and Fitch. The ratings are from AAA to a D with AAA being the highest rating and D the lowest. Any bond rated BAA or higher by Moodys and or BBB by Standard and Poors is consider to be an investment quality bond.

Well, that's about it on bonds, saving bonds and the bond market. I hope you have found this site to be useful, and thank you for getting this far. I am always delighted to hear from visitors to my sites, and will always try to answer any questions you may have, but please bear with me as I do receive many emails a day, and I have to fit my own trading in as well! - so please be patient. My own view of savings bonds is that they should provide an important part of your savings and investing plans, and I hope that I have helped to de-mystify the saving bonds market for you a little - kind regards - Anna