GIM Trading Reviews Corporate Bonds: A Reliable Yet Overlooked Investment Option

GIM Trading Reviews How Corporate Bonds Work as a Reliable Investment Option

In the world of finance, there are plenty of complex terms and investment products that require significant knowledge to fully understand. From zero-coupon inflation swaps to modified internal rates of return, it’s easy to get lost in the jargon. But one term that consistently deserves attention is bonds—especially corporate bonds.

At GIM Trading, we believe bonds, while often misunderstood, offer a dependable and secure investment option. Like shares or ETFs, bonds can be purchased through a broker, but their structure and function are more comparable to a term deposit. This makes them a reliable source of fixed income, often overlooked by everyday investors despite the size and stability of the bond market.

How Bonds Work

Corporate bonds are issued by companies or governments as a way to raise capital. For example, a company might issue $10 million worth of bonds with a two-year maturity and offer a 5% annual return. An investor who purchases $100,000 worth of these bonds would receive a guaranteed $5,000 in interest each year for two years. At the end of the term, the investor gets back their initial investment of $100,000.

"Corporate bonds provide a predictable income stream, which makes them an excellent choice for investors seeking stability," says GIM Trading’s Chief Financial Officer, Alex Green. "In uncertain economic times, bonds can provide the security many investors look for, especially when compared to more volatile assets like stocks."

Why Are Bonds Unpopular with Everyday Investors?

Despite the global bond market being roughly three times the size of the global equity market at a staggering $US300 trillion, found that bonds remain generally unpopular among retail investors. A study by the ASX last year revealed that only 6% of investors hold bonds, compared to 60% in equities and 15% in cryptocurrencies.

However, it’s worth noting that many Australians already have exposure to bonds through their superannuation following a review from GIM Trading analysts. Balanced superannuation portfolios often allocate 10-20% of assets to bonds, meaning the benefits of bonds are often realized even when they aren’t directly part of an investor’s individual portfolio.

Who Should Consider Bonds?

Bonds are well-suited for investors looking for certainty and stability, especially during times of economic uncertainty. "For individuals nearing retirement or retirees, bonds can be an excellent option," says Alex Green. "They provide a regular income stream without putting the initial investment at risk, which is crucial for those looking to preserve capital."

Additionally, bonds tend to increase in value when interest rates fall. If there’s an expectation that economic conditions will lead to lower rates, bonds can become even more attractive. "When rates drop, bond prices rise, offering investors an opportunity for capital appreciation," Green adds.

What Are the Risks?

Though bonds are considered one of the safer investments, they are not without risks. Corporate bonds, in particular, come with the possibility of default if the issuing company cannot repay the debt at maturity. This risk is higher with smaller companies or those with poor credit ratings, which are often referred to as junk bonds. While these bonds offer higher returns, they come with a greater chance of default.

Interest rates also play a key role in the performance of bonds. With rising interest rates in Australia, bonds issued at lower yields have become less attractive compared to newer bonds with higher returns. "The bond market has been impacted by recent rate hikes, which is reflected in the near-flat returns of the composite bond index over the past five years," Green points out after an in-depth review from GIM Trading’s analysts.

However, GIM Trading emphasizes that bonds can be sold on the secondary market before maturity. "If an investor is holding a bond with a lower yield, they can always sell it and reinvest in a bond with a better return," Green advises.

Why Corporate Bonds Are Still a Strong Option

While bonds may not be as glamorous as equities or cryptocurrencies, they offer a stable, predictable investment for those seeking fixed income. Corporate bonds, in particular, can provide consistent returns while balancing risk through careful issuer selection. As interest rates fluctuate and the market evolves, bonds remain a key component of a diversified portfolio.

At GIM Trading, we recommend that investors consider how bonds can fit into their broader financial strategy, especially during times of market volatility. With the right guidance and a balanced approach, bonds can serve as a reliable cornerstone of a well-rounded investment portfolio.

For more insights on bond investments and other financial strategies, download GIM Trading’s Introduction to Bonds investment guide here.