Bonds 101: Licence to yield. Building a smarter portfolio

The Art of Investing is back for episode 3, and this week we’re exploring another asset class - how bonds serve as a powerful tool for diversification, offering a counterbalance to equities in your portfolio.

Join Rich McDonald, Chris Fellingham and Mark Holden to discover the secrets hidden in the attributes of bonds - issuer, interest rate, and maturity. Hear about the recent highs in global stock markets powered by rising copper prices, the ripple effects of international trade negotiations, including Japan's successful tariff deal with the U.S., and market reactions to earnings reports from Netflix and General Motors.

The intimidating power of the bond market is explained with a Thames Water 6.75% 2030 bond as an example, as we explore capital structure hierarchy, highlighting the prioritisation of bondholders over equity holders in financial distress scenarios.

Explore the fascinating relationship between bond prices and yields, likened to a seesaw where rising prices mean falling yields. Often perceived as lower-risk investments compared to equities, factors influencing longer-dated bond prices include inflation, interest rates, and economic growth.

What you’ll learn in this episode

Bonds Have Key Attributes: Bonds are financial instruments characterised by three attributes: an issuer, an interest rate, and a payback date. They represent a form of borrowing where the bondholder earns interest over time and is repaid the principal amount at maturity.

Market Sentiment Can Drive Share Performance: Even when companies like Netflix report strong financial results, share prices can fall if market expectations have been set too high. This highlights the importance of understanding investor sentiment and expectations when analysing stock movements.

Global Trade Negotiations Impact Markets: Trade agreements and tariffs between countries, such as those involving Japan, Europe, and the U.S., can significantly influence stock market performance. For example, Japan securing better-than-expected tariff terms resulted in a boost for its stock market.

Commodity Prices Can Influence Indexes: The performance of certain stock indexes, like the FTSE 100, can be closely tied to commodities such as copper. The FTSE 100, with its significant number of mining companies, benefits from higher commodity prices.

Technology and Market Evolution: Companies that once dominated markets can decline dramatically over time. Nokia, once the largest company in Europe, has seen its shares fall 87% in the past 25 years, illustrating the rapid evolution of technology and market dynamics.

Get in touch with the show by emailing theartofinvesting@ig.com

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This podcast is provided for educational and informational purposes only. The content presented is not intended as personal investment advice, financial planning guidance, or a recommendation to buy, sell, or hold any particular securities or investments. All...