Which Bonds Should I Buy

Learning how to buy bonds is an essential part of your education as an investor. A well-diversified portfolio should always strike a balance between stocks and bonds, helping you ride out volatility while still capturing growth along the way.

which bonds should i buy

Buying individual bonds offers unique challenges. In addition to a wide range of moving parts inherent in each bond, the primary market can be difficult to access for all but the wealthiest investors. Meanwhile, the secondary market has less transparent pricing than primary issues.

The easiest way to buy bonds is to invest in bond mutual funds or bond exchange-traded funds (ETFs). Funds own large, diversified fixed-income portfolios comprising hundreds or even thousands of bonds.

Buying individual bonds via your brokerage account is more complicated. Typically online brokers offer access to bond secondary markets, which means that availability and prices wholly depend on existing holders looking to sell.

Bond ETFs can be purchased through any standard investment account listed above, like an investment company, an online broker or a financial advisor. Be sure to do your research on the best bond ETF options before you decide which way to go.

You can request the IRS or your state tax department to deposit your tax return directly into your TreasuryDirect account where you can use the funds to purchase savings bonds or marketable Treasury securities. All you need to do is provide TreasuryDirect's routing number and your TreasuryDirect account number in the refund instructions on your tax return.

Note: The three purchase limits above apply separately. That is, in a single calendar year you could buy $10,000 in electronic Series EE bonds, $10,000 in electronic Series I bonds, and $5,000 in paper Series I bonds.

The most important thing to remember about purchasing marketable bills, notes, bonds, Floating Rate Notes, or TIPS is that the limits are set for each auction, not by year. The limit for noncompetitive purchases is $10 million for each security type and term, for each auction. This limit applies regardless of whether you're buying a bill, note, bond, Floating Rate Note, or TIPS, and regardless of what method you use to make the purchase (TreasuryDirect, broker, or dealer).

The education tax exclusion permits qualified taxpayers to exclude from their gross income all or part of the interest paid upon the redemption of eligible savings bonds, when the bond owner pays qualified higher education expenses at an eligible institution.

To qualify for the exclusion, the bonds must be Series EE or Series I savings bonds issued after 1989 in your name, or, if you are married, they may be issued in your name and your spouse's name. Note: A bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or the child.

If you only look at the rate your savings bonds are earning, they may not seem like a competitive investment at first. But when you factor in all the tax advantages, your bonds are earning more than you think.

If you want to switch from deferred reporting to annual reporting of interest, you must do it for all your savings bonds. You must also report all interest earned up to the year of the change in reporting procedure. If you later wish to change from annual reporting to deferred reporting, either attach to your tax return a statement asking for this change or submit IRS Form 3115 (the fee for the form is waived in this case). See IRS Publication 550 for details.

It's important to register your bonds correctly. Registrations for Series EE and I Bonds, both electronic and paper bonds, can vary, so it's a good idea to find out how to register each type of bond. View information about registrations for EE and I Savings Bonds.

Savings bonds can be registered to trusts in the name of the trustee of a personal trust estate. Personal trust estates are defined in the governing regulations as trust estates established by natural persons in their own right for the benefit of themselves or other natural persons in whole or in part, and common trust funds comprised in whole or in part of such trust estates.

Savings bonds reissued to a personal trust estate are no longer issued in paper form but, instead, are issued as electronic bonds in TreasuryDirect. See information about trust registrations for electronic bonds.

When Series HH or H bonds are reissued to a trust, the new owner must certify that the taxpayer identification number is correct and must not be subject to backup withholding. Certification is accomplished by completing an IRS Form W-9 or a similar certification statement on FS Form 1851 (reissue application).

When Series HH bonds bearing issue dates of October 1989 and after are reissued to a personal trust, a trustee must complete and sign an SF 1199A providing the appropriate direct deposit information for semiannual interest payments.

When savings bonds are registered in the name of a trust, the trustee(s) requests payment. The bonds should be submitted to Treasury Retail Securities Services, PO Box 214, Minneapolis, MN 55480-0214.

We favor high-quality investment-grade bonds relative to riskier lower-rated bonds. That applies to both the taxable and non-taxable arenas. Valuations are compelling in high-quality municipal bonds in the intermediate to longer maturity range."

Historically, bonds have offered shelter for portfolios when financial storms touch down on Wall Street. But bonds have not been a haven this year in the grip of surging inflation and fast-rising interest rates. Instead, fixed-income assets ranging from U.S. Treasuries to higher-yielding "junk bonds" have logged double-digit-percentage losses resembling declines suffered by more-volatile stocks.

Bond experts have been surprised by the swift and steep drop in bond prices, causing yields, which move in the opposite direction, to spike sharply higher. "No, it's not normal at all," says Andy McCormick, head of global fixed income at fund company T. Rowe Price.

But amid all the gloom in bond-land, there are rays of sunshine peeking through the clouds, says LPL's Gillum. "We think the worst is behind us," he says. The valuation and yield on all types of bonds, he says, look much better today than at the start of the year.

Just as stocks go on sale in a bear market, bonds have moved from the full-price aisle to the discount bin. That doesn't mean rates can't move even higher if inflation stays hot. But keep in mind that the forward-looking bond market has already pushed interest rates significantly higher to account for coming Fed increases. "Markets have already priced in a pretty bad scenario," says Elaine Stokes, executive vice president and portfolio manager at investment firm Loomis Sayles.

If you're eyeing even more income, high-yield bond yields recently hit 8.5%, compared with 4.35% at the end of last year; corporate bond yields hit almost 5%, versus 2.35%, according to ICE/Bank of America indexes tracked by the St. Louis Fed. The yield on the Agg is now nearing 4%, up from 1.75%. The higher yields, which provide some cushion if bond prices dip further, spell opportunity for investors whose portfolios now have low weightings in bonds.

That murky outlook is why Michael Fredericks, manager of BlackRock Multi-Asset Income fund, is not advising investors to bet on bonds "with all your chips" just yet. Stokes, of Loomis Sayles, offers this advice: "I wouldn't go all-out. I'd start tiptoeing in."

Conservative investors should consider short-term bond mutual and exchange-traded funds, which are less sensitive to future interest rate increases and now sport plump yields. "If yields of 3% to 3.5% are what you're looking for, short-term Treasuries have become a lot more attractive," says Stokes. And with shorter-term corporate bonds, "the default risk is very low," says Fredericks.

To gain exposure to Treasuries that mature in one to three years, consider the Vanguard Short-Term Treasury ETF (VGSH (opens in new tab), $59, yield 3.05%), which sports a rock-bottom expense ratio of 0.04%. You'll get an additional percentage point of yield with the Vanguard Short-Term Corporate Bond ETF (VCSH (opens in new tab), $76, 4.09%), which owns investment-grade debt of companies such as Boeing (BA (opens in new tab)) and Microsoft (MSFT (opens in new tab)) that will mature in one to five years.

Spread your bets around, the bond pros say. And stick with high-quality and short- to intermediate-term bonds (ones that mature in three to 10 years) that offer competitive yields with less credit and interest rate risk than dicier fare, says Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.

With more volatility expected, given the uncertain outlook, a good strategy is to invest in a diversified fund benchmarked to the broad Agg index, which includes investment-grade U.S. Treasuries, corporate bonds and mortgage-backed securities. "Higher-quality corporates and U.S. Treasuries can withstand economic distress," says Haworth.

The Baird Aggregate Bond (BAGSX (opens in new tab), 3.44%), a team-run fund that takes a disciplined, long-term approach that eschews big bets, is a good choice. The fund's 1.79% annualized gain over the past 10 years has outpaced 82% of its peers, according to fund tracker Morningstar. At last report, nearly 60% of the fund's assets were invested in AAA bonds, with corporates making up the biggest part (39%) of the portfolio. Passive investors might like the iShares Core U.S. Aggregate Bond ETF (AGG (opens in new tab), $101, 3.28%), which has a low expense ratio of 0.03%.

Most Wall Street pros say if a recession does hit, it will be a shallow one. And that means fewer companies will run into financial trouble and be at risk of defaulting on their debt. What's more, investment-grade companies entered the bear market in strong financial shape, which will help them weather a downturn, says Baird's Stanek. "There's decent value there," she says. 041b061a72