WSJ Your Money Briefing - As Interest Rates Fall, Bonds Become a More Attractive Investment

Episode Date: September 26, 2024

As interest rates decline, some financial advisers are steering their clients toward bonds. Wall Street Journal reporter Vicky Ge Huang joins host J.R. Whalen to discuss what you should know about buying bonds and how they compare to other investments. Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

OCI is the single platform for your infrastructure, database, application development, and AI needs. Do more and spend less like Uber, 8x8, and Databricks Mosaic. Take a free test drive of OCI at oracle.com slash wall street. Here's your money briefing for Thursday, September 26th. I'm JR Whalen for The Wall Street Journal. When it comes to investing, stocks often overshadow bonds in getting most of the attention. But with economists expecting more interest rate cuts in addition to last week's move by the Federal Reserve, bonds are grabbing a piece of the spotlight.

Bonds historically are considered to be the safer and more boring part of an investor's portfolio. There is definitely the risk of loss, especially in corporate bonds, but in the treasury space, bonds are considered nearly risk free. We'll talk to WSJ reporter Vicki Huang after the break. of Vicky Huang after the break. or OCI. OCI is the single platform for your infrastructure, database, application development, and AI needs. Do more and spend less like Uber, 8x8, and Databricks Mosaic. Take a free test drive of OCI at oracle.com slash wall street, oracle.com slash wall street. Paul Matzkoff Falling interest rates mean that bonds may be an attractive investment again. Wall Street Journal reporter Vicki Huang joins me. Vicki, help us understand the basics for a moment.

How do lower interest rates boost bonds as an investment option? Vicki Huang So lower interest rates boost bonds because we have bonds that were already issued in the past when interest rates were high. So those bonds were issued with higher interest payments. So those bonds pay more interest income to you as an investor. And when the Fed lowered interest rate last week, the short-term interest rates became lower. So we have newer bonds that are issued with lower interest rates.

And this means that the existing bonds that were issued with higher yields or higher interest payments all of a sudden became a lot more attractive to investors. So those demand help drive up the price of those existing bonds. If the Fed continues to lower rates could we see more of a push into the bond market? Yes if the Fed continues to lower short-term interest rates we could see investors going into intermediate term or even longer term bonds more and more. So far, a lot of investors for the past few years have piled into short-term treasuries and cash-like investments such as money market funds because short-term interest rates have been

historically high for the past few years, given the Fed's campaign to raise interest rates and combat inflation. If the Fed continues to lower interest rates, the interest income that investors are able to earn from short-term treasuries and other cash-like holdings will shrink as interest rates become increasingly lower. How do bonds differ from stocks? So stocks are basically an investor's bet on how the company might fare in the

future. So investors who buy the stock of a company are betting on how well the company can perform and they basically stand to lose their entire investment if something wrong happens with the company and the stock falls to zero. But bonds are essentially the loans that investors give to a company or the state or local government. In most scenarios, investors can expect to get at least some of their principal back even if something happens to the issuer of the bond. Which particular types of bonds do advisors suggest that people take a look at in this environment?

So there are many different types of bonds to investing. A lot of financial advisors recommend their clients to stick to treasuries and specifically in this environment intermediate term or longer to treasuries and specifically in this environment intermediate term or longer term treasuries because treasuries are essentially risk-free investments because they're backed by the US government but if you're reaching for more yield more returns you might look at corporate bonds that tends to be a little bit more risky but pays a little bit more to investors for taking on that risk.

Once you buy a bond, how long is it recommended that you hold it? It depends on your particular situation. And a lot of financial advisors, they look at the fixed income or bond portion of their client's portfolio as the money that they might need to spend soon. So some advisors recommend that clients hold the bonds to maturity. It means that if you buy a three-year bond, you hold it for three years. Now people can hold different types of bonds for different durations. How do financial advisors suggest that people manage multiple bonds that they have? So one way financial advisors have recommended that their clients manage a whole lot of different

bonds is to assemble a ladder of bonds. So you basically buy a portfolio of bonds that mature at different points in time and then once one bond matures you can take that interest income and reinvest again. So you get a steady stream of income throughout a period of time without having to worry about losing money because of the swing or changes in interest rates. How risky are bonds compared to other investments? Bonds historically are considered to be the safer and more boring part of an investor's portfolio. There is definitely the risk of loss, especially in corporate bonds when a company defaults instead

or even declares bankruptcy, you could stand to lose most of your investments. But in the treasury space, bonds are considered nearly risk-free. That's WSJ reporter Vicki Huang. And that's it for your Money Briefing. This episode was produced by Zoe Culkin with supervising producer Melanie Roy. I'm JR Whalen for The Wall Street Journal. Thanks for listening. AI may be the most important new computer technology ever, but AI needs a lot of processing speed and that gets expensive fast. Upgrade to the next generation of the cloud,

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