Investing in US markets

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15. Bonds

Bond investing by private investors has a much broader history in the US than in many other markets, including the UK.

If you have a dollar dealing account with a broker you will be able to deal in a range of bonds, including bonds issued by companies and municipalities. US investors are keen on these municipal (or 'muni') bonds because they have tax advantages.

Non-resident investors may like to consider sticking to US Treasury bonds. These are the equivalent of UK gilts. That is, they are tradable IOUs issued by the US government, normally bearing a fixed interest rate (or 'coupon') and a predetermined repayment (or maturity) date.

US government bonds are effectively free from any risk of default. The US government, like the UK one, has never failed to meet an interest payment or repay a bond on time and in full. This does not mean that bonds are risk free. A number of factors go into making a decision about whether or not to invest in a particular bond, or bonds in general.

Bond prices vary inversely with interest rates. It may not be a good idea to invest in bonds if you think the next movement in interest rates could be upward.

Longer-term bonds with low coupons are more volatile than shorter bonds or those with higher coupons.

Because they have a fixed interest rate, most bonds are highly vulnerable to increasing inflation.

Bonds are commonly assessed on the basis of their redemption yield. This is the total return you can expect to earn from he bond on an annual basis if you buy and hold it to maturity. This includes interest, interest on the interest, and any change between your buying price and the redemption value of the bond. Under normal circumstances, the further away the redemption date, the higher the redemption yield.

It is worth reading up on bonds if you are not familiar with investing them.

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