Investing can be tricky, even when it comes to so-called "safe" investments such as bonds. Whena company issues a bond, the money they receive in return is a loan and must be repaid over time. Many investors choose bonds as long-term investments because they are supposed to guarantee returns on investment in addition to yearly interest income.
However, if you're investing in bonds, you should keep an eye out for these three major signs that it's time to sell right away.
Key Takeaways
- Bond investors often are in it for the long-haul, earning regular interest payments until the debt matures.
- Investors of bonds, however, may decide it is more advantageous to sell a bond rather than hold it to maturity.
- Some of these reasons include anticipation of higher interest rates, that the issuer's credit will be lowered, or if the market price seems unreasonably high.
1. Interest Rates Are Set to Rise
The most significant sell signal in the bond market is when interest rates are poised to rise significantly. Because the value of bonds on the open market depends largely on the coupon rates of other bonds, an interest rate increase means that current bonds – your bonds – will likely lose value. As newer bonds are issued with higher coupon rates reflecting the increased national rate, the market prices of older bonds with lower coupons will decrease to compensate new buyers for their relatively lower interest payments.
Pundits, analysts and anyone with a social media account can speculate about how and when the Federal Reserve will raise rates. If you sell your bonds as soon as someone hints at the word "hike," you may be jumping the gun. Instead, keep a close eye on announcements after the meetings of the Federal Open Market Committee (FOMC). The FOMC decides on the future of U.S. interest rates at these meetings, so take any definitive announcements from the FOMC seriously. When the market consensus is that a rate increase is right around the corner, it's time to go to market.
Unless you are set on holding your bonds until maturity despite the upcoming availability of more lucrative options, a looming interest rate hike should be aclear sell signal. There is one small caveat thatapplies to short-term holdings or those that are near maturity. If you hold bonds or other debt securities that have less than a year until maturity, interest rate risk is minimal, since your return on investment is so closeand the coupon payments have been largely exhausted.
2. The Issuing Entity Seems Unstable
Another good reason to liquidate your bond holdings is if the issuing entity suddenly becomes financially unstable, suffers a huge loss that compromises its ability to remain profitable in the future, or becomes embroiled in legal issues. Since the appeal of bonds is that they generate guaranteed income, the credibility and solvency of the issuing entity is a primary concern. If the government or corporation that issued your bonds declares bankruptcy, for example, you are likely to recover only a portion of your investment.
Look into the financials of the companies or governments that issued your bonds on a regular basis – or make sure your financial advisor does – and seriously consider selling if it looks like they might be heading for a downward spiral. While you may recover some of your money if a bond issuer defaults, liquidating your holdings before the real trouble starts and reinvesting in a more secure product is a simpler and more sensible option.
3. The Market Price Is Unusually High
Like stock traders, active traders of bonds often look to technical indicators for buy and sell signals. To maximize returns, it is important to have set rules about how much profit you expect and how much of a loss you are willing to take. Though holding bonds until maturity can be moderately lucrative, you might be able to generate bigger gains by selling when the market value is high, especially if you've already held the bond for several years and have benefited from coupon payments.
By keeping an eye on the average market price of your bond over both short- and long-term periods, you can pinpoint moments when the price of your bond is highest and sell before it moves back down toward the mean. Some bond traders use a roll-down return strategy for reaping profit by selling bonds as their price increases. With this strategy, the price usually increases as the bond nears maturity.
Like stock analysis, using an interactive charting tool makes this much easier. Look for moments when the short-term simple moving average (SMA) crosses up through the long-term SMA. This indicates that the current selling price for your bond has been consistently higher in recent days than it has been within your chosen long-term window.
Of course, you should always do a cost-benefit analysis before any trade. If the holding period return generated by selling now is equal to or greater than if you held it until maturity, it's probably time to sell.
FAQs
If you want to keep all your good interest and get the most out of your I Bonds you should cash out: after earning 3 months of lower interest and. just after the 1st of the month.
When should you sell bonds? ›
If you want to keep all your good interest and get the most out of your I Bonds you should cash out: after earning 3 months of lower interest and. just after the 1st of the month.
When should I cash out my I bonds? ›
You can get your cash for an EE or I savings bond any time after you have owned it for 1 year. However, the longer you hold the bond, the more it earns for you (for up to 30 years for an EE or I bond). Also, if you cash in the bond in less than 5 years, you lose the last 3 months of interest.
Should you sell bonds when yields rise? ›
If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond's price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates.
How do you know if a bond is good or bad? ›
Bonds with a rating of BBB- (on the Standard & Poor's and Fitch scale) or Baa3 (on Moody's) or better are considered "investment-grade." Bonds with lower ratings are considered "speculative" and often referred to as "high-yield" or "junk" bonds.
Should I buy or sell bonds during a recession? ›
Are bonds a good investment during a recession? Yes, bonds are generally considered a good investment during a recession due to their relative stability and predictable income stream.
How much is a $100 savings bond worth after 30 years? ›
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
Most bonds can be cashed in after one year, but you will lose three months' worth of interest if you cash them in before five years. If you are holding hundreds of dollars in savings bonds, you will still get them back at their current value.
How do I avoid taxes when cashing in savings bonds? ›
You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you're using the money to pay for qualified higher education costs. That includes expenses you pay for yourself, your spouse or a qualified dependent. Only certain qualified higher education costs are covered, including: Tuition.
What is the best way to cash bonds? ›
Where do I cash in a savings bond? You can cash paper bonds at a bank or through the U.S. Department of the Treasury's TreasuryDirect website. Not all banks offer the service, and many only provide it if you are an account holder, according to a NerdWallet analysis of the 20 largest U.S. banks.
As for fixed income, we expect a strong bounce-back year to play out over the course of 2024. When bond yields are high, the income earned is often enough to offset most price fluctuations. In fact, for the 10-year Treasury to deliver a negative return in 2024, the yield would have to rise to 5.3 percent.
Should I sell I bonds now? ›
If the fixed rate is higher, do not redeem. The fixed rate rose to 0.4% in November 2022 so any I bond purchased after that date should be held. Likewise, you may want to hold on to I bonds issued between May and October 2023. Those I bonds have a fixed rate of 0.9%, which is the highest fixed rate in 16 years.
Why are people selling bonds? ›
Investors trade bonds for a number of reasons, with the key two being—profit and protection. Investors can profit by trading bonds to pick up yield (trading up to a higher-yielding bond) or benefit from a credit upgrade (bond price increases following an upgrade).
Why is bond not a good investment? ›
Call risk is the likelihood that a bond's term will be cut short by the issuer if interest rates fall. Default risk is the chance that the issuer will be unable to meet its financial obligations. Inflation risk is the possibility that inflation will erode the value of a fixed-price bond issue.
Why are bonds losing money right now? ›
Rising interest rates directly caused stock and bond prices to fall in 2022. Interest rates affect a company's capital and earnings in many ways, says Damian Pardo, a certified financial planner and city commissioner in Miami, Florida. First, companies made less.
What are the disadvantages of bonds? ›
Cons
- Historically, bonds have provided lower long-term returns than stocks.
- Bond prices fall when interest rates go up. Long-term bonds, especially, suffer from price fluctuations as interest rates rise and fall.
Key Takeaways
Investors trade bonds for a number of reasons, with the key two being—profit and protection. Investors can profit by trading bonds to pick up yield (trading up to a higher-yielding bond) or benefit from a credit upgrade (bond price increases following an upgrade).
Will bond funds recover in 2024? ›
As for fixed income, we expect a strong bounce-back year to play out over the course of 2024. When bond yields are high, the income earned is often enough to offset most price fluctuations. In fact, for the 10-year Treasury to deliver a negative return in 2024, the yield would have to rise to 5.3 percent.
Do bonds do better when stocks go down? ›
Bonds tend to be less volatile and generally outperform stocks during a recession. A bond is essentially a loan. Whether you get your investment back depends on the issuing entity repaying that loan. “Bonds, such as Treasurys, corporate bonds and municipal bonds, have contractual cash flows,” Kowalski says.
When would it be a good investment to sell bonds at a discount? ›
It would be a good investment to sell bonds at a discount from par if the coupons rate happens to be lower than what is the rate of interest in the market. Due to the fact that what investors are interested in is higher profit, they would not want to pay much for bonds that have lower coupon rates.
