5 Issues for Bond Investors to Consider: Wells Fargo

Bonds can mitigate volatility of returns when they are used properly as part of a diversified investment strategy. And a smoother ride means investors are likelier to stay invested in the markets, which Wells Fargo considers the best strategy.

But again, it is important to avoid holding a concentrated position in a single segment of the fixed income market because doing so can make portfolios more volatile.

4. Yield

Before choosing a bond investment that offers the highest yield, investors should think about the marginal benefit in moving out on the yield curve. The report notes that longer-term maturities are highly sensitive to interest rates, while staying too short on the yield curve provides little yield and return. 

Wells Fargo recommends intermediate-term maturities that will generate some yield and avoid near-zero returns in shorter-term ones.

Investors should also keep in mind that if prices should spiral upward and cash flow remains the same, they may not be able to meet expenses.

5. Liquidity

Most fixed income investments uniquely enable investors to plan for specific cash needs. If they can anticipate when they will need cash for a big purchase, they can buy bonds with a maturity near the time they will need money. This can be an effective way to stay invested in the markets and still have some assurance that money will be available when needed, the report says.

The report cautions, however, that selling bonds before maturity — if a need to raise money suddenly arises — can be costly and result in big losses if the market moves against the seller.