Investing in bonds: A secure strategy for building your wealth

Bond investment is an essential component in structuring a balanced portfolio. Popular for its stability, this type of investment generates regular income streams while limiting exposure to market volatility. As a debt instrument, a bond is a contractual claim between an issuer (public or private) and an investor.

Including bonds in an asset allocation can help meet the objective of capital preservation, while maintaining a risk-adjusted return outlook. However, like all investments, bonds entail risks that need to be carefully managed.

Bonds enable public (governments, local authorities) or private (companies) entities to finance their development, in return for a contractual commitment to investors.

Definition and operation

A bond is a debt security representing a loan granted by an investor to an issuer. It provides for the payment of periodic interest (or coupons), as well as repayment of the principal at the agreed maturity date. Bond maturities can vary from a few months to several decades.

Main types

• Sovereign bonds: Issued by governments, these are often considered the least risky, although their yield is moderate.
• Corporate bonds: Offering a more attractive yield, these carry a credit risk specific to the issuer.
• Inflation-indexed bonds: Their value and coupon are adjusted to inflation, thus protecting purchasing power.
• Convertible bonds: can be converted into shares under certain conditions.
• High-yield bonds: Offering higher yields, they involve greater risk.

Bonds play a structuring role in an investment strategy: they provide stability, income visibility and effective diversification.

Partial capital protection

Bondholders are among an issuer's preferred creditors, ahead of shareholders, in the event of default.

Predictable income streams

Coupon payments provide a regular income stream, which is particularly valuable for decumulation or prudent allocation.

Useful diversification

Bonds react differently to macroeconomic events than equities. Their inclusion in a portfolio helps limit overall volatility.

Global exposure

As the bond market is global, investors have access to a variety of instruments, in terms of geography, sector and risk profile.

Despite their reputation as a defensive investment, bonds present certain risks that need to be carefully assessed.

Default risk

This risk arises if the issuer fails to honor its commitments (payment of interest or repayment of principal). This risk is particularly acute in the case of high-yield corporate bonds.

Interest rate risk

The value of a bond on the secondary market is inversely correlated with interest rates: when rates rise, the price of existing bonds falls.

Liquidity risk

Certain thinly traded securities may be difficult to sell quickly, especially in times of market stress.

Inflation risk

Inflation in excess of the bond's nominal yield reduces the real yield, or even cancels it out, if it is not anticipated.

Several approaches are available, depending on the investor's level of expertise, time horizon and risk tolerance.

Direct purchase

Bonds can be purchased on the primary or secondary market. This strategy requires a good command of the technical characteristics of the product and the issuer.

Bond funds

These collective vehicles provide access to a diversified, professionally managed portfolio, while pooling risk. Some specialized funds include instruments such as private debt or mezzanine debt.

Bond ETFs

Exchange-traded funds (ETFs) offer immediate exposure to a basket of bonds, with generally low fees and high liquidity.

Green bonds

These securities finance projects with a positive environmental impact. They combine the traditional characteristics of bonds with an extra-financial dimension linked to ESG issues.

Defining an allocation strategy

A relevant bond strategy is based on clear objectives: security, income generation, or optimization of the risk/return profile. The distribution between durations, ratings and geographical zones will be decisive.

The tax treatment of bonds depends on their nature, the issuer's jurisdiction and the investment envelope used. Some instruments, such as government bonds and green bonds, are eligible for tax benefits. It is essential to consult a professional to optimize the tax impact of your investments.

To take full advantage of the potential of bonds, a disciplined approach is recommended.

Diversify exposure

Combining different issuers, sectors, maturities and currencies helps mitigate specific risk.

Assess credit quality

Particular attention should be paid to issuers' credit ratings and fundamentals.

Take a long-term view

Smoothing out market effects and securing constant returns are two advantages of a long-term holding strategy.

Follow interest-rate trends

Bonds are sensitive to monetary cycles. Anticipating the decisions of central banks is an important steering lever.