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Putting bonds to work

An overview of the potential benefits of bonds, including income, diversification, price appreciation and steadier returns.

Whether you are saving for your first home or about to retire, bonds are likely to be an essential part of your investment portfolio. That is because bonds offer investors a number of potential benefits, including income, diversification, price appreciation and steadier returns when compared to stocks.

What are bonds?

government building, cash and office buildingBonds are issued by governments and companies to raise capital. A bond is like an IOU. When you buy a bond, you are lending money to the issuer, who agrees to pay it back at a specific time, and in most cases, to make regular interest payments along the way. Many people associate bonds with U.S. Treasuries, however, they represent only about 13% of the worldwide total. Today’s global bond market is huge and is valued at more than $90 trillion.

Investing through a bond fund

stack of money and bondsIf investing in bonds seems right for you, consider investing through an actively managed mutual fund. In a bond fund, a professional portfolio manager will search for opportunities across markets, research and select bonds on your behalf. Bond funds also give you access to a wider range of bonds, providing an opportunity to increase return potential and diversify risk. A bond fund that invests in a broad selection of bonds can provide a solid foundation for your portfolio.

The potential benefits of bonds

person standing near goalsWhether or not you should invest in bonds will depend on your individual investment goals. Some of the main reasons to invest in bonds include:

  • Income: Many bonds make regular interest payments, and investors can reinvest that money to help grow their principal or receive it as income.
  • Price appreciation: Bonds have the potential to help your investment grow through price appreciation. Of course, as with any investment, there is also the chance that prices will fall.
  • Steadier returns: Historically, bonds have offered steadier returns than stocks. This can help reduce big swings in your portfolio and preserve your assets.
  • Diversification: Because stock and bond prices often move in different directions, bonds may help diversify your portfolio, thereby reducing overall risk. Diversification does not ensure against loss.

THE RELATIVE STABILITY OF BONDS

Bonds tend to be much less volatile than stocks – a key reason to invest in them.
The chart is two circles side by side. One circle represents the worst year for stocks (2008, S&P 500 Index returned -38%) and the worst year for bonds (1994, Barclays U.S. Aggregate Index returned -3%). 
Worst calendar year returns for the 1989–2014 time period. Stocks and bonds represented by the S&P 500 Index and Barclays U.S. Aggregate Index, respectively.

Bonds Are Different

There may be a place for passive, but it’s not bonds.

Learn Why

Disclosures

Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information are contained in the fund's prospectus and summary prospectus, if available, which may be obtained by contacting your investment professional or PIMCO representative or by visiting pimco.com/investments. Please read them carefully before you invest or send money.

A Word About Risk: Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic, and industry conditions.

Barclays U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. The S&P 500 Index is an unmanaged market index generally considered representative of the stock market as a whole. The index focuses on the Large-Cap segment of the U.S. equities market. It is not possible to invest directly in an unmanaged index.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.