In today’s unpredictable markets, it’s no wonder more investors are turning to fixed-income investments – especially bonds – to maintain stability in their portfolios. Historically, bonds might have a reputation for being “boring,” but their ability to offer reliable income and lower risk makes them a smart choice in uncertain times.
Government and corporate bonds can provide a balance of stability and returns that’s hard to replicate for high-net-worth individuals, family offices, and institutions.
Of course, bonds aren’t completely risk-free, with interest rate changes, inflation, and geopolitical tensions all potential challenges. But with the right strategy, fixed-income investments can deliver a powerful mix of income, capital preservation, and risk management. This is especially true for high-yield options like Redhat’s 12% fixed-income bond, which combines attractive returns with robust risk management.
In this article, we’ll explain why bonds may deserve a spot in your portfolio and how they can help you confidently navigate today’s market uncertainty.
The appeal of fixed-income investments
While there are different types of bonds, vanilla bonds are attracting the most attention. In essence, these fixed-income investments involve lending money to governments, corporations or institutions in exchange for regular interest payments and the repayment of principal on a pre-set maturity date.
The degree of income available will depend on market conditions at the time and the credit rating of the underlying issuer. As you would expect, there are numerous reasons why fixed-income investments might appeal to investors. These include:-
Predictable income streams
As with equities, the higher the risk, the higher the potential reward for bond income payments. However, structured correctly, they can provide constant cash flow, typically through quarterly or semi-annual coupon payments. It’s not difficult to see the attractions for those looking for steady long-term income, perhaps planning for retirement.
Lower risk profile compared to equities
As we mentioned above, there is a relatively low correlation between the movement in bond prices and equities. Bond prices will often remain relatively steady when equity markets fluctuate, providing a degree of hedging and a level of protection. Looking at the broader picture, all investments will be impacted to some extent by local and global economic trends. Still, the relative movement in bond prices is ideal for those prioritising risk management.
Asset monetisation and liquidity management
Due to the relatively steady nature of many government and corporate bonds, they can be instrumental as collateral. This is especially relevant for asset-rich, cash-poor investors seeking to increase their liquidity without selling core assets. This brings us on to hypothecation, a practice often used by institutional investors, involving using assets as collateral to secure funding, without requiring their sale.
Institutional appeal
In recent years, we have seen a significant increase in the level of investment in fixed-income investments, mainly bonds and, to a lesser extent, private credit. While the main focus is on security and consistent returns, when it comes to larger institutions, it’s also important that the market in a particular bond(s) is liquid. This means they can buy and dispose of significant bond holdings anytime.
Inflation and interest rate considerations
In the world of investment, everything is relative, which also goes for bond income in relation to inflation and interest rates. Here at Redhat Capital, we have a 12% bond that pays interest quarterly, helping offset the relative income reduction caused by inflation. This has been particularly useful in recent times, where high inflation significantly reduced (in some cases negated) relative income from lower-yielding bonds.
Broad benefits of fixed-income investments
Over the last few years, when markets have experienced significant volatility, the benefits of fixed-income investments, predominately bonds, have moved into the spotlight. They have always been popular with institutions and high-net-worth individuals but have become a staple diet of the modern balanced portfolio. Not only a useful tool for liquidity, bonds also offer a real hedge against equity market volatility and uncertainty, a priceless characteristic for many investors.
Bonds as a portfolio stabiliser
Whether you describe them as a portfolio stabiliser or a backbone, there’s no doubt that government and corporate bonds can offer a degree of stability. It’s obviously important to select those with a strong balance sheet, but there are numerous ways in which bonds assist investors.
Diversification benefits
When looking at bonds and other fixed-income investments, it’s easy to focus on the difference between bonds and equities. However, due to the size and depth of the global bond market, there is also the opportunity to diversify across asset variations, sectors, and even countries. This can take into account your stereotypical equity sectors, and then we have real estate and commodities.
Low correlation with equities and other assets
As we touched on above, bonds tend to move independently of stock markets, providing a useful counterbalance during equity downturns (at the cost of reduced relative gains when equity markets are hitting new highs). While there will always be a degree of correlation due to changing economies and industry trends, they are typically much less volatile than equities. This has proved equally useful in mitigating volatility driven by geopolitical tensions and interest/inflation fluctuations of late.
Capital preservation
The combined benefit of income and repayment of government and corporate bonds can be crucial when it comes to capital preservation. Typically, government bonds associated with the UK and the US attract the highest credit ratings, offering a secure way to preserve capital. While high-rated institutional-grade corporate bonds may attract a similar income or even lower because of their relative stability, in broad terms, corporate bonds tend to provide a higher income than government bonds.
Changing times
Interestingly, due to the financial challenges many governments faced, such as the 2008 financial crisis and the Covid pandemic, the likes of Apple and Microsoft have a higher credit rating than the US and UK governments. Historically, these periods have been relatively brief, but due to ongoing uncertainty, this may be a sign of things to come.
Regional stability in emerging markets
Latin America and Asia are often associated with emerging markets where the issue of bonds by governments and companies can help secure vital capital. Many of these emerging markets experience high volatility but can provide an interesting opportunity for both capital growth and significant bond interest payments. The degree of investment in these volatile markets will depend on individual risk profiles, but as part of a long-term diversification strategy, they can provide enhanced returns.
Income laddering
Income laddering is an interesting investment strategy whereby bond maturities and income are deliberately staggered over several years. This not only ensures varying income streams but also helps to maintain liquidity. As bonds mature, they are repaid, and funds are reinvested. As markets and rates change, there is a degree of investment risk, but it is all relative and a useful long-term liquidity play nevertheless.
Inflation protected securities
Some fixed-income/bond market products have inflation protection written into the bond agreement and covenants. While dependent on individual issues, the repayment at maturity and/or income payments can rise in line with inflation. This ensures that income and/or capital will at least maintain their relative spending power, providing a useful hedge against long-term inflation.
Managing duration risk
The highly liquid global bond market, led by the US, enables effective management of duration risk by aligning bond maturities with investment horizons. This strategy provides income certainty and minimises sensitivity to interest rate changes, making it especially valuable for institutional investors managing large, long-term portfolios.
Types of bonds and suitability for global investors
In this article, when looking at fixed-income investments, we have focused on government bonds, corporate bonds and, to a lesser degree, private credit. We will now look at the range of different bonds available and the type of global investors they tend to attract.
Government bonds (Treasuries)
These types of bonds are popular with global investors, with a particular focus on the US, UK and Europe. They are ideal for conservative investors looking for income and capital preservation. Historically, treasuries tend to attract lower yields than the majority of corporate bonds due to the degree of financial security reflected by the credit rating. However, as we covered earlier, this is not always the case.
Corporate Bonds
Corporate bonds have many variations, such as investment grade, high yield and emerging market bonds. While the US has the largest bond market in the world, there are significant markets in Europe, Asia, and further afield. These bonds tend to offer better returns than highly rated government bonds, with the credit rating reflected in the coupon and the likelihood of repayment.
There is a massive variance in this market, which provides a useful means of diversifying not only wider portfolios but, more specifically, the fixed-income element.
Municipal bonds
There is a huge global municipal bond market, but they are particularly popular in the US. Typically exempt from federal taxes and sometimes state/local taxes, they are an efficient means by which state and local governments can raise funding. In the US, high-net-worth individuals can benefit from preferential tax treatment when buying municipal bonds. However, as specific tax breaks are focused on locals, municipal bonds may have limited appeal for some international investors.
Sovereign bonds
These bonds are an extension of government securities used by national governments to raise funds for everyday operations, pay down debt or cover interest on current debt. While government bonds tend to be issued in the local currency, sovereign bonds can be issued in a foreign currency. This can help to widen the investment pool, attracting the interest of international institutions and investors.
High yield bonds
In recent times, the high-yield bond market has attracted the interest of global investors. These are companies with a credit rating below that of investment-grade bond issues, obliged to pay an increased rate of interest to reflect the added risk. This is a reflection of the risk/reward ratio, although careful investment can lead to above-average income and even capital appreciation.
Emerging market bonds
In the hierarchy of bond ratings, emerging market bonds are below high yield bonds, seen as high risk and potentially high return. While seen as a means of diversifying fixed income investment portfolios, it’s essential to appreciate the risk/reward ratio and allocate any asset weightings accordingly.
Global bond markets
As you can see from the varied range of global bonds available in different sectors and countries, they provide a wide range of risks and potential returns. Besides financial health, there are numerous factors to consider, such as the local/global regulatory environment and political risks. Even though bonds are significantly less volatile than their equity counterparts, it’s important to appreciate the risks and potential returns associated with specific sectors and countries.
You will also see countries taking different approaches to local taxes, often creating a challenge for family offices and institutions looking to optimise returns.
There are also other variables to add to the mix, such as offshore bonds, tax treaties and choosing bonds with favourable withholding tax conditions. So, while there are many different types of bonds, there are significantly more issues to consider as part of a wider long-term investment strategy.
Bonds in the context of wealth preservation and estate planning
For many investors, both individuals and institutions, bonds can be a critical element of wealth preservation and estate planning. Structured correctly, they can provide a range of benefits such as:-
- Steady income
- Capital protection
- Tax management
In bull markets, it’s very tempting to focus on growth stocks and capital appreciation, sometimes overlooking the importance of capital protection. While not all bonds have the same risk or potential rewards, they provide a degree of security. It’s important to appreciate that long-term investment strategies should reflect the importance of capital protection and not just focus on capital appreciation.
Managing risk with bonds
Understandably, many investors will look to fixed-income investments, particularly corporate bonds, deeming them less risky than equities. This is a fair assessment, but it is important to appreciate not only the individual bond issuers but also the associated risks which take in:-
- Credit risk – the risk that an issuer may default on interest or bond redemption payments.
- Interest rate risk – the impact on bond prices and relative incomes in relation to global interest rate changes.
- Inflation risk – this is a reflection of the purchasing power of income and redemption proceeds, which can be eroded by inflation.
- Reinvestment risk – the risk that cash flows, interest payments and redemptions may have to be reinvested at lower interest rates.
- Currency risk – an obvious one, the risk that exchange rate fluctuations will negatively impact the returns on bonds nominated in foreign currencies.
- Liquidity risk – often overlooked, this is the ability to buy and sell bonds in significant volume in extreme market conditions.
When looking at individual companies, the credit rating system provides a useful indicator of an issuers’ underlying financial health. Local and global geopolitical and economic changes can also impact financial stability.
So, while many focus on the specific risk associated with the issuer, there’s much more to consider!
The Redhat Capital 12% fixed-income bond
While historically fixed-income investments have provided a degree of security, it still comes down to selecting the right assets and strategy. The team at Redhat Capital manages our 12% fixed-income bond, which has a flawless quarterly payment history.
The bond is backed by a diverse portfolio of international assets, including FX, commodities, futures, options, alternative investments and global bonds. This helps to mitigate risk and ensure a degree of stability. Our bond, which is listed on the Vienna Stock Exchange, is proving very popular with institutions and high-net-worth individuals looking to maintain long-term income streams and preserve capital.
Using advanced risk management strategies and decades of experience, we have managed to maintain payments and stability throughout what have been challenging markets over recent years.
Conclusion: Navigating Volatile Markets with Fixed-Income Investments
In today’s unpredictable financial landscape, fixed-income investments – especially bonds – have proven far more than a conservative choice. They offer a powerful combination of predictable income, capital preservation, and diversification, making them indispensable for high-net-worth individuals, family offices, and institutions aiming to safeguard and grow their wealth.
However, maximising the benefits of bonds requires a strategic approach. Carefully selecting a mix of government, corporate, and international bonds and risk management techniques can help navigate market volatility effectively.
As markets continue to evolve, now may be the time to reconsider the role of fixed-income investments in your portfolio, ensuring a foundation of stability and growth for the future. If you’re interested in the Redhat Capital 12% fixed-income bond, please contact us for more information.
Image credit – Photo by Floriane Vita – Unsplash
