Why It’s Smart To Buy Bonds Over Other Investments With Any Future Stimulus Checks

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The idea of additional stimulus checks has been discussed since the first ones were rolled out during the pandemic. If additional stimulus were to be approved, using the money to buy bonds, which are created when a government or corporations want to raise money, can be a wise investment compared with other forms of investing. 

Here are four reasons it’s smart to buy bonds with money from any possible future stimulus checks.

Also see four investments you should never make with a stimulus check.

Predictable Income

Bonds have two components: principal and interest. The amount you invest to purchase the bond is known as your principal, while the interest is the amount the bond issuer pays you for investing. When you purchase a fixed-rate bond, you receive a fixed interest percentage, also known as the coupon rate. 

Let’s say you purchase a $1,000 bond with a 4% coupon rate. In the first year, the bond will pay you $40. Interest may compound depending on the duration and type of bond. With fixed-rate bonds, even if interest rates drop, your coupon rate will remain the same over the life of your bond, giving you predictable income.

This can help you maximize the value of any possible stimulus checks.

Less Volatility 

Unlike the stock market, which can experience significant swings, the bond market is relatively stable. Bonds issued by governments and established corporations aren’t impacted by many of the risks the stock market and junk bonds have. You may see your bond value go up or down a few dollars, but total losses are uncommon for high-quality bonds. 

Junk bonds are high-yield bonds generally offered by corporations seeking to raise capital quickly, and they have poor credit ratings. They often have higher yields, but they tend to be more volatile than government and established corporation offerings. 

Low Risk of Default 

There is a low risk of default when investing in government bonds. The U.S. defaulting on its bonds would have a catastrophic impact on the economy, so it typically prioritizes repaying these amounts to investors.

Similarly, corporations with strong track records have low risks of default as well. Default rates on investment-grade corporate bonds have averaged 0.1%, per Schroders, meaning it’s very unlikely that high-quality corporate bonds will default.

With a low risk of default, you can safeguard your investment from volatile market swings and economic downturns. 

Portfolio Balance

Bonds are a great way to balance your portfolio. Since stocks and alternative investments can have higher risks, it is important to also invest in low-risk assets, like bonds. 

During a market downturn, you may see the value of your stock market investments significantly drop; however, your bond values will likely remain stable, giving you access to funds that haven’t depreciated come maturity.

Whether you receive another stimulus check or simply have leftover cash to invest, bonds make a great investment option. Predictable income, reduced volatility, low default rates and portfolio balancing opportunities are four reasons bonds should be considered in your investment plan.

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