The 411 on Bonds

For What It's Worth -

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Hi there,

It’s allergy season, but this week’s happenings are nothing to sneeze at. Markets are on edge as economic data and business report cards come out, and experts say the horizon is darkening. Here’s what we’re watching:

  • Inflation cools…slooooowly: Consumer prices were up 5% from a year ago in March, which was better than expected and an improvement from February’s 6%, but investors aren’t celebrating yet. The Fed likes inflation to be around 2%, so many analysts say more interest rate hikes are still possible. If you’re wondering what interest rates have to do with inflation and the stock market, maybe this quick explainer from a previous edition will help. We also have a list of ways to prepare for an extended period of high rates.
  • Earnings season kicks off: It’s time for public companies to show us how they performed in the first three months of the year and give us guidance on what’s to come. Investor expectations are low as a number of experts are predicting weak results from the majority of companies. While a few companies have already announced, all eyes will be closely watching tomorrow's results from major banks like JPMorgan, Wells Fargo, and Citigroup for more information on the economic outlook and banking crisis.
  • Tax day is almost here: The deadline to file your taxes (April 18) is rapidly approaching, and if you haven’t gotten around to it yet you can request an extension. Remember you’ll still have to pay what you owe by the regular deadline, even if you file later. Refunds are smaller this year as pandemic programs end, so before calculating, check for any windfalls in your budget. It’s also never too early to think about protecting your savings in future years.

In the positive news department: theaters are packed with crowds keen to watch a portly Italian plumber stop his dragon-like nemesis with world domination plans. Beaten-down theater stocks like AMC, IMAX, and Cinemark soared.

News you can use

  • EVs stand to get a big boost from the US Environmental Protection Agency’s (EPA) new proposal to limit automobile pollution. Though the rules don’t require a specific number of EVs to be sold each year, the EPA estimates that two-thirds of new vehicles will need to be electric by 2032 — that’s ten times greater than today’s EV sales. In other EV news, Walmart just announced plans to roll out a dedicated fast-charging network, General Motors invested in a startup developing a more sustainable way to extract lithium, and Ford will spend $1.3 billion to convert an SUV factory into an EV assembly plant.
  • This guac is extra green. Chipotle has unveiled a responsible restaurant design (solar panels, heat pumps, EV charging, etc.) for its North American expansion. By 2024, 100 new locations will have all-electric equipment and other new features. The burrito chain aims to cut direct and indirect greenhouse gas emissions 50% by 2030 from 2019 and ties ESG goals to executive bonuses. On Tuesday it also released its 2022 Sustainability Report.
  • One in five Americans have been threatened with a gun, nearly that share have lost a family member to a gunshot, and one in six have witnessed a shooting. These stunning stats from a new KFF survey are said to capture how pervasive gun violence is as the country records its 15th mass shooting of 2023. If you’re looking to see whether any of your investments include civilian gun manufacturers and/or major gun retailers, non-profit As You Sow’s Invest Your Values tool allows you to check a fund’s exposure to them and identify gun-free funds should you want to consider them for your portfolio.
  • Morningstar’s Best Sustainable Companies to Own list for 2023 is out. The 50 firms included stand out from the competition (wide economic moats) and have low ESG risk scores based on their exposure to and management of sustainability issues. Ranked by ESG risk score, the top companies are Keysight Technologies, Accenture, Moody's, ASML Holding, and Experian.

Asking for a friend….

We know there is a lot to think about these days, and it can sometimes be a bit overwhelming. To help with those nagging questions and so you have useful resources at your fingertips, here are few links to resources and past stories relevant in these turbulent times:

Figure in Focus: More than 3,900

That’s how many megawatts of electricity the 34 large Bitcoin mines in the US consume, according to The New York Times. This is nearly the same amount of power used by the three million homes that surround them or all the residences in New York City.

This additional burden on the nation’s power supply has led to price surges in some areas and contributes to carbon pollution. “They’re adding hundreds of megawatts of new demand when we already face the need to rapidly cut fossil power,” said Princeton professor Jesse Jenkins. “If you care about climate change then that’s a problem.” Mines also get paid by the government to shut off for a while to avoid blackouts.

Ever since China banned Bitcoin mining in 2021, operations moved to other countries, including the US. “Miners” solve complicated math puzzles to verify transactions on the network and earn newly created coins as a reward. This process is extremely energy-intensive, and the global Bitcoin network consumes an estimated 138 terawatt-hours (TWh) of electricity per year, more than entire countries like Norway or Sweden.

The world’s largest cryptocurrency is staging a dramatic comeback this month, and related ETFs like the ProShares Bitcoin Strategy ETF (BITO), Bitwise Crypto Industry Innovators ETF (BITQ), and VanEck Bitcoin Strategy ETF (XBTF) have been rising. But climate-conscious investors will be watching to see if and how mines increase the use of sustainable energy or if Bitcoin’s algorithm is changed like Ethereum’s.

Bond, Green Bond

What comes to mind when you think of bonds? We don’t blame you if Daniel Craig or Pierce Brosnan is the first thing that pops into your head, but we’re thinking about another kind of bond today — one that is far less mysterious but can be an attractive part of your investment strategy.

Bonds are a core part of many portfolios, but what are they, and are there options for values-aligned investors? We break down the market to help you understand the various types of bonds and how to invest in them.

Bonds — just another IOU

In simple terms, a bond is a loan. A corporation or government (the issuer) sells bonds to investors with the promise to pay back the money after a certain timeframe. You might hear them referred to as fixed-income securities, which is a fancy way of saying that the investment provides a steady stream of interest income for a certain period. The federal government, companies, municipalities, and states use bonds to finance projects and operations — anything from building new schools or roads to hiring employees and keeping the lights on.

Once the bond reaches maturity (which you can expect to happen after a preset number of months/years, unlike with kids), you receive your principal back in addition to any interest earned over the term. That said, you don’t have to hold a bond until maturity; most can be sold to other investors after they have been issued.

In the open market, bond prices fluctuate just like stocks — sometimes dramatically, which has been the case recently. The banking crisis in March ignited some of the wildest swings in the Treasury market since 2008, Axios reported. Traders betting on interest rate moves can also impact prices. When interest rates rise, bond prices usually fall, and vice versa.

Types of bonds

As we mentioned earlier, those paper savings bonds are just one of many types. The major categories include:

  • Corporate bonds: issued by companies that want an alternative to bank loans
  • Municipal bonds (aka munis): issued by states and municipalities
  • Government Treasury bonds: issued by the US Treasury; this category includes several varieties, including:
  • T-bills: bonds with a year or less to maturity
  • T-notes: bonds with one to ten years to maturity
  • T-bonds: bonds with more than ten years to maturity
  • Treasury inflation-protected securities (TIPS): Treasury securities that are indexed to inflation; as inflation rises, so does the principal portion of the bond
  • Agency bonds: issued by government-affiliated organizations such as Fannie Mae or Freddie Mac

The type of bond impacts the rate investors can expect to receive. Bonds that are higher quality or have shorter maturities typically offer lower interest rates.

Considerations for investing in bonds

Most personal finance experts will tell you that a diversified portfolio should include at least some bonds, which are good for preserving capital. Bonds are typically less volatile than stocks and will return your entire principal if you hold them to maturity. Many experts advise investors to start allocating a bigger percentage of their investments to bonds as they get closer to retirement.

Since bonds are generally less risky than stocks, they also provide a lower rate of return. Historically, long-term government bonds have earned around 5% in average annual returns, compared to 10% for stocks, according to NerdWallet. However, many investors find a guaranteed return, particularly when the market is choppy, a key part of a long-term strategy.

That said, different types of bonds come with different levels of risk. Treasuries are considered one of the safest investments because they are backed by the full faith and credit of the US government. We’ve talked in the past about why TIPS and Treasury Series I bonds can be particularly appealing to some when inflation increases. Conversely, “high yield” or “junk” bonds issued by companies with low credit ratings have a higher risk of default (and investors can expect higher interest to compensate them for that risk). Credit rating agencies like Standard and Poor’s, Moody’s, and Fitch Ratings rate the quality of bonds, so you’ll know how likely it is that you'll get your expected payments.

You’ll also want to consider taxes. Interest from corporate bonds is taxable at both the federal and state levels, but treasuries are generally exempt from state and local taxes.

How to buy bonds

There’s not a one-stop shop for all bonds; your purchase experience will differ depending on what type you are looking to buy. The best way to buy treasuries is directly from the government via the recently improved but still clunky TreasuryDirect.gov website. If you want corporate bonds, however, you’ll need to go through a broker. Keep in mind that you’ll be buying from other investors looking to sell.

Like stocks, you can also invest in bonds through mutual funds and ETFs. This approach allows you to buy into a basket of many bonds, giving you more diversification. If you have a 401(k), IRA, or online brokerage account, you will likely have a few options for bond funds and ETFs. Morningstar has a helpful list of some of the largest bond funds (along with their 2022 performance), such as the Vanguard Total Bond Market ETF, iShares TIPS Bond ETF, and the Fidelity US Bond Index.

Green and blue bonds for eco-conscious investors

Wait, bonds come in colors? Yep, green and blue in particular. Many sustainable and impact investors are drawn to green bonds, which help finance sustainable projects like renewable energy, recycling efforts, clean transportation, etc. Blue bonds, meanwhile, help fund water-related projects like wastewater treatment and removing plastic waste from the ocean.

This asset class has soared amid growing interest in sustainable investing, with more than $1 trillion of green bonds issued in the past two years. They are not typically available to individual investors, but some mutual funds and ETFs include them in their offerings, like the Calvert Green Bond Fund, iShares Global Green Bond ETF, and TIAA-CREF Green Bond Fund.

If you’re drawn to the idea of preserving your capital while investing in the health of the planet, it’s important to know that there is not yet a universal standard for determining the environmental friendliness of a bond, and greenwashing is rampant in the sector. A recent study found that only 28% of green bonds issued in 2022 included language actually holding the issuer to any green promises, and 61% specifically disclaimed any duty to invest the proceeds in a green manner.

If you’re thinking about investing in a green bond fund, the MSCI ESG Fund Ratings Tool provides some detail on how various funds align to climate goals and are exposed to climate risk.

Whether you choose to jump into a deep research session to see if a particular bond or ETF is right for you or you just file this new-found knowledge about bonds away for later, we think that the more you know about the investing world, the better prepared you will be to make your own financial decisions moving forward.

Before you go -

Officer Hops won’t be solving crime in California, but he will be available for snuggles and boops.

** FWIW team members own shares of Citigroup, General Motors, JPMorgan, and Walmart. We’ve also survived a few run-ins with the less-than-ideal user interface on TreasuryDirect.gov to buy Treasury bonds.

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