During the global financial crisis of 2008, most bond portfolios typically fell 30 percent to 40 percent, which is absurd in a bond portfolio. However, the credit crisis offers several lessons. Firstly, allocation and diversification in a bond portfolio are extremely vital. Gone are the days of just accepting any bond offer from brokers. Investors must be capable of doing the groundwork and hunting for what they should buy to balance their portfolios rather than just take what their brokers sold them.
So it is important to plan and create the portfolio carefully. Here are the top five methods for researching bonds:
1. The Yahoo Finance Web site provides comprehensive information on bonds. Up-to-date quotes, access to tools for researching bonds and wide-ranging information on how bond trading works can be found on this website. The Yahoo Finance Help will be sufficient in helping to navigate the website.
On the Yahoo home page, the ‘Finances’ link in the list of services will navigate to the Yahoo Finance home page. Then the ‘Bonds’ link under the ‘Investing’ tab on the Yahoo Finance home page will lead to a list of United States Treasury Bonds rates and related articles. News on the developments in bonds can be found in the ‘Bond News’ section. Furthermore, composite bond rates, bond screens and a complete bond market summary is available in the ‘Tools’ section.
2. Morningstar’s free mutual fund screener can be utilized to obtain funds investing in high-yield corporate bonds appropriate for present times. This can be done by selecting ‘Funds’ and then ‘Fund Screener’ in the ‘Tools’ section on Morningstar’s homepage (www.morningstar.com). Morningstar rates funds on a scale from one to five stars where five is the top rating. These ratings are based on historical returns vs. volatility. The volatility is treated as risk in this case. Specifying five stars will then restrict the field to the funds with the best track records.
Bond Credit Ratings are also done by Morningstar. The choices are low risk, below average risk, average risk, above average risk, and high risk. Select average risk to leave out high-risk funds. Bond rating agencies categorize bonds with letter arrangements such as AAA, AA, or B, where AAA is the safest. It must be noted that ratings A, AA, AAA, and BBB indicate investment value, whereas BB, B, and C have little or no investment value. Selecting Average Credit Quality Below BBB will list funds concentrating in high yield bonds with little investment value. Selecting Less than Five Years on the Duration menu will help reduce interest rate risk.
3. Researching a bond is a lot like investigating a stock and this should be a crucial part of bond analysis. It is vital to get to know what a company does for a living and gather data by looking at quarterly numbers. Another important point is whether management is bond-friendly. Chief Executive Officers who are always repurchasing shares, increasing dividends and making acquisitions may be actually just trying to raise their status. Moreover, they could be favoring shareholders over bondholders. So it is then imperative to read about a bond and also ‘Google’ it periodically.
4. Financial periodicals such as Barrons, Equities Magazine and the Wall Street Journal, newspapers such as the Financial Times, and reliable Internet resources like Smart Money can be made use of to study the general level of interest rates that can be anticipated in bonds. Reviewing states and localities to see which ones are undergoing positive and negative cash flow trends will help a bond researcher well-informed. In terms of municipal bonds, it is wise to consider those that have steady or improving bond metrics. This can be measured by looking at the outstanding debt per person or debt to tax revenue flow.
5. Another very important method is to take a look at the credit ratings by major ratings agencies such as the Standard and Poor’s Investment Service, Fitch’s Bond Rating and the Moody’s Investment Service. As mentioned earlier, bonds have either investment-grade or junk-bond ratings. It is best to look at only investment-grade bonds for the security of the principal and to get steady income. Ratings for Moody’s investment grade go from the highest quality Aaa to the lowest investment grade Baa-3. Yields go up as the ratings fall. Municipal bonds are recommended (Suze Orman states this all the time) and are usually very safe investments. Still, rating changes can influence the principal value of the bond.