Inverse relationship
In the fixed-income world, “yields” typically refer to yield to maturity, which is the expected annual rate of return on a bond if the bond is held until maturity, assuming there is no default by the issuer.
There is an inverse relationship between bond prices and yields. If yields go up, bond prices decline, and vice versa.
This is because if prevailing interest rates or bond yields go up, existing bonds (whose coupons have been fixed at the time of issuance) with lower yields become less attractive, causing their prices to drop.
Conversely, when interest rates decline, existing bonds with higher yields become more attractive, pushing their prices up.
This negative relationship explains why the bond market was under significant pressure in 2022, when global central banks hiked interest rates to tame inflation and why it has performed so well since April 2024, as the moderation of inflation allowed central banks to cut policy rates.
Which to buy?
Developed market government bonds are generally considered low-risk investments. However, this is not true for all markets, said fixed-income asset management firm Pimco.
Investors need to be aware that some government bonds – for example, those issued in emerging markets – may carry higher levels of risk, while providing investors with access to investments offering different income and growth profiles, it added.
Corporate bonds fall into two categories: investment grade and speculative grade. Speculative-grade bonds are issued by companies perceived to have lower credit quality and higher default risk.
Singapore retail investors can choose from various bonds, including government bonds, such as Singapore Government Securities and Singapore Savings Bonds; domestic corporate bonds; and bonds issued by companies domiciled in other countries and denominated in foreign currencies.
When choosing a bond