Before heading into the impact of coronavirus on bonds, it’s worth covering a few basics first. The first is ‘asset classes’, which just means the different types of investments you can hold, like shares, property, bonds, cash, and commodities which can be things like investing in gold or oil. Now, each asset class works in its own way and responds differently to current events and market changes.
Generally speaking, shares are the riskiest or most volatile asset as returns aren’t guaranteed and your money is subject to the performance of that company. Bonds on the other hand are considered a ‘safe-haven’, typically offering a fixed return and are often legally protected.
But Covid-19 has changed a lot of things, so how have bonds performed during this pandemic?
Investing in bonds during Covid-19
Having a diversified investment plan is a great way to reduce your volatility as well as risk, so having bonds in your plan can help reduce the impact of significant market swings. But are bonds still comparatively safer as they’ve historically been considered to be?
With many investors looking to reduce their risk as the impact of Covid-19 (and the global lockdown that followed it) became apparent, many turned their attention to bonds or decided to hold it in cash. In a bear market (where the market falls more than 20% and stays down), bonds will often continue to pay out and typically won’t see the kind of losses that you may experience in shares.
There are a huge number of factors that have allowed bonds to stay as smooth as they have currently. We’ve seen vast amounts of money being pumped into the economy from central banks across the world. Central banks across the globe have taken a ‘whatever it takes’ approach to keeping the economy afloat, and much of this has been purchasing bonds at a rate that has previously never before been seen [1].
This approach boosted demand for bonds, increasing prices, and that obviously reduces the current yield, or potential return. So, while investors money may have been more protected than being held in other asset classes, it also reduced the potential they’d see.
Then, we saw increased global demand for the US dollar – which is something that often happens during a time of crisis. And while that’s good for some investors, it tends to have a negative impact on emerging market bonds which tend to perform better in good times – the negative impact was greater on emerging markets that borrow in US dollars.
Why it could be a good idea to diversify your portfolio
Since April bonds have had a more stable couple of months, with many countries seeing prices rise (and yields fall), although this has not been universal, but there’s really no telling what the future may hold. The measures that governments around the world have taken have been huge, we’ve seen fiscal and monetary policy coordinate to support the recovery after the world’s economy was hindered dramatically by lockdown measures.
Instead of looking for a single opportunity, why not look to spread your risk across a range of different investments? Not only does this help to potentially limit your losses, but it could also help to bolster your finances in the long run.
At Wealthify, we build risk-managed investment plans that are designed around you. You decide how much risk you want to take with your investments, choose how much money you’d like to invest, and our experts will do the rest. Your Plan will contain a wide range of things, including bonds, but it will be globally diversified to help spread the risk and make your money work harder.
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Please remember that past performance is not a reliable indicator of your future results.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
