Buying bonds: Investing money wisely and profitably – What should you keep in mind?

Why buy federal bonds?

Federal bonds, also known as government bonds, can be viewed as promissory notes. When you buy a bond, you lend the German government a certain amount, which in turn is paid interest for an individually determined period of time – for example, one month or 30 years. You, as the lender, are regularly paid interest, which is also known as a coupon. The amount lent is also repaid by the end of the term.

But that also means that unlike stocks, which you can theoretically sell quickly if necessary, the money you loan is gone once you have done so. This means that bonds behave in a similar way to fixed-term deposits – with the exception that bond funds can also be resold and terminated.

Buy bonds with the neobroker of your choice

Buying bonds is now easier than ever, because thanks to the large selection of neobrokers and online banks, private investors also have the opportunity to invest their money sensibly and quickly on their own. When buying bonds, however, pay attention to the order and transaction fees that apply. These can reduce your return.

As with buying classic ETFs, buying bond ETFs requires a securities portfolio. Various providers such as finanzen.net Zero are available for this purpose* and TradeRepublic* available. With these two, each transaction costs one euro – with finanzen.net Zero*However, the commission is waived for orders over 500 euros.

Fortunately, you only have to pay for the deposit with very few providers, including ING*, 1822direct*, justTrade* or Consorsbank*. If you value a large selection of ETFs, Scalable Capital* with over 2,500 ETFs, this might be the right choice for you. Here you can trade all stocks, funds, ETFs, certificates, leveraged products and bonds that are listed on German stock exchanges. And foreign stocks are also available here at reasonable and fair conditions. ING's offering is similarly broad*, even if you are limited to a few trading venues.

Comdirect* Not only does it offer 1,100 stocks, over 1,700 ETFs that can be used for savings plans and over 6,000 funds, users of the trading platform can also choose the right product for themselves from a wide range of bonds. Interestingly, trading is also possible at weekends at Lang & Schwarz via the browser and app. However, make sure that the comparatively high trading fees are worth it for your needs.

Which bonds to buy? The big question

If you want to buy bonds, it is generally a low-risk business – as long as you lend your money to countries that are considered particularly creditworthy and are unlikely to go bankrupt within the term. These include Germany and the Netherlands. The rating agencies S&P, Fitch and Moody's have given the two countries a rating of AAA. By comparison: Turkey, which has particularly high inflation, currently has a rating of B.

Smart investors already know that a good portfolio should not only consist of stocks. Instead, it is advisable to invest in countercyclical products. If you have already dealt with ETFs, you should also understand the principle of bond ETFs. Exchange Traded Funds track an index and therefore enable investors to diversify their portfolio with little money and experience.

ETFs and bond ETFs differ primarily in terms of the assets – instead of investing in stocks, you also invest in debt securities sold by companies, institutions or governments. Another advantage of the ETF variant is that the total expense ratio (indicated as TER) is very low. This is the reason why fees are usually low.

One of the most popular bond ETFs is the iBoxx Eur Germany Covered (TER at 0.09 percent). But the Corporate Bond iShares Corporate Bond ESG ETF with a TER of 0.15 percent is also one of the lower-risk bonds for private investors. It is also good to know: When making your selection, you should also take a look at whether the respective bonds within the ETF are as broadly diversified as possible. This is advisable, for example, if you do not only want to buy German bonds.

Buying government bonds – does it make sense during a recession?

Government bonds benefit when central banks lower interest rates and the country goes into recession. Unlike stocks, the value usually falls noticeably, while bonds remain stable and promise comparatively good returns. If price changes do occur, they are often much more moderate than on the stock market.

Increases in key interest rates mean that interest rates on bonds also increase. Thanks to the European Central Bank's countermeasures to stop inflation, securities that have recently fallen out of fashion are now delivering good returns again after years. This is a sensible way to top up retirement savings. The security of bonds can be reassuring for investors, especially in times of recession.

In times of negative interest rates, Germany could borrow money from anywhere and get respectable compensation for it – but now you can buy government bonds again and get paid decently for the financial injection for the state. In April 2023, the yield was 2.36 percent – almost 200 percent more than the year before.

Buy corporate bonds – yes or no?

You may want to buy corporate bonds alongside government bonds to diversify your portfolio. This is also an investment that supports a specific company with loaned money. In the past, one of the most important bond buyers was the ECB – the European Central Bank bought billions in government and corporate bonds to push down interest rates. However, this has now changed due to the interest rate turnaround.

Important to know: The yield on the bond is influenced by, among other things, the market value of the respective share. A rising share price can be a sign of generally positive economic development, which can lead to rising interest rates from central banks as they try to prevent the economy from overheating. When interest rates are increased, the yields on newly issued bonds rise, while existing bonds can lose value.

Buying bonds: Private investors should pay attention

Private investors should be aware that corporate bonds are associated with a significantly higher risk than government bonds from creditworthy countries with an AAA rating. However, if your risk profile allows it, investing in a large company could also be an option for you. Your money will then be used, for example, to expand or refinance – and this risk can be offset by a high return.

Buy Swiss government bonds

In principle, you can of course also buy bonds outside the Eurozone. However, it is important to note that the securities are issued in the applicable national currency. This means that you have to pay attention to the exchange rate, but you may also be able to use exchange rate fluctuations to gain additional euro money. If you want to buy Swiss government bonds, you will most likely benefit from the country's high creditworthiness and liquidity.

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