If you are thinking about investing in bonds and other debt instruments, you’ve come to the right place. In this article we will discuss how to invest and the benefits that will help you diversify and strengthen your portfolio.
The debt market has evolved significantly over the years, and as a result, offers investors a wide range of options to meet different financial objectives and risk profiles.
What are bonds and debt instruments?
Bonds are debt instruments issued by governments, corporations and other entities to raise funds. When you buy a bond, you are essentially lending money to the institution in exchange for periodic interest payments and repayment of principal at maturity.
Other debt instruments include:
- Treasury Bills: Short-term debt issued by the government.
- Corporate bonds: Issued by companies to finance their operations.
- Mortgage obligations: Backed by mortgages.
- Municipal bonds: Issued by local governments to finance public projects.
Each of these instruments has different characteristics and risk levels, allowing investors to select options that align with their financial objectives and risk tolerance. Below we are going to talk about the bonds that you can find in our country, Mexico.
National Bonds.
In the context of Mexico, as mentioned above, there are several types of bonds issued by the federal government that are popular among investors. Here are some of the most important ones:
- Federal Treasury Certificates (CETES)
CETES are securities issued by our government and belong to the family of zero coupon bonds, which means? They are sold below face value and pay their full value at maturity. They are an ideal option for investors seeking security and short terms, with maturities ranging from 28 days to one year.
- Federal Government Development Bonds (BONDES)
BONDES are floating rate instruments issued by the Ministry of Finance and Public Credit (SHCP) through the federal government. These bonds are auctioned in the bond market and have terms of 3, 5 and 7 years, paying periodic interest. They are attractive for investors seeking yields adjusted to market rates.
- Federal Government Development Bonds denominated in Investment Units (UDIBONOS)
UDIBONOS are bonds issued in Unidades de Inversión (UDIs). According to Banco de México, these investment instruments protect the investor against unexpected changes in the inflation rate. UDIBONOS are placed at long maturities and pay interest every six months based on a fixed real interest rate determined at the date of issuance of the security. Notwithstanding the foregoing, to date these securities have been issued for terms of 3, 5, 10, 20 and 30 years.
- Savings Protection Bonds (BPAs) replaced by BPAG28
Issued by the Instituto para la Protección al Ahorro Bancario (IPAB) through Banco de México, the BPAs or BPAG28 are suitable for investors seeking stability and protection of their savings. The interest rate you will pay monthly will be based on the higher of the 28-day CETES annual rate or the Weighted Government Funding Rate, and will be applied at the beginning of each interest period. The maximum term for this structure is 3 years.
The evolution of the debt market
The debt market has grown in size and complexity, offering investors more options and opportunities. Why has it evolved so quickly? This is due to several factors:
- Globalization: Investors now have access to debt markets around the world.
- Financial innovation: New products and strategies have been developed to meet the changing needs of investors.
- Regulation: Regulatory changes have affected the issuance and trading of debt instruments.
Advantages of investing in bonds
Investing in bonds and other debt instruments offers several advantages, do you want to know what they are? We share with you the 5 main advantages:
- Stability: Bonds are less volatile than stocks, offering a stable source of income.
- Fixed returns: Periodic interest payments provide predictable income.
- Diversification: Bonds can reduce the overall risk of a diversified portfolio.
- Inflation protection: Some bonds, such as UDIBONOS, are designed to protect against inflation.
- Safety: Government bonds are considered one of the safest investments.
Disadvantages of investing in bonds
He considers that there are also some disadvantages in which he finds himself:
- Low yields: Compared to stocks, bonds generally offer lower yields, so if you are looking for a higher return, look for other options.
- Interest rate risk: Bond prices fall when interest rates rise.
- Credit risk: There is a risk that the issuer may not be able to meet its payment obligations.
- Inflation: If not chosen correctly, bonds can lose purchasing power in an inflationary environment.
- Liquidity: Some bonds may be difficult to sell before maturity without incurring losses.
How to start investing in bonds and other debt instruments?
- Define your objectives: As mentioned above, when you are going to invest, it is essential to define your financial objectives and your risk tolerance.
- Research: Analyze the different types of bonds and other debt instruments available.
- Diversify: Don’t put all your eggs in one basket; one of the keys to financial success is to diversify investments.
- Consult a professional: Consider talking to a financial advisor for personalized recommendations.
Current trends in the debt market
- Green bonds: Issued to finance ecological and sustainable projects.
- Social bonds: For projects with a positive social impact.
- Inflation-linked bonds: Offer protection against inflation.
- Emerging market corporate debt: Opportunities in growing economies.
The evolution of the debt market has expanded opportunities for investors. Understanding how to invest in bonds and other debt instruments can be a powerful tool for diversifying your portfolio and achieving your financial goals. By following the strategies and tips above, you can navigate the debt market with greater confidence and security.
