Debt Securities 2024: Investments to Avoid or Keep an Eye On?

The global financial markets are becoming more volatile, prompting investors to seek investment options with lower risk than stocks and commodities. Bank deposits offer very low interest rates, gold prices soar above the clouds, and bonds have become a reasonable solution for investors who want good returns but are not ready to lose their capital quickly.

What are bonds and how do they differ from stocks?

To put it simply, bonds are “loans” written on paper that can be traded. When you buy a company’s or government’s bond, you are lending them money, and they promise to pay you interest every ( typically twice a year) and return the principal at maturity.

The difference from stocks is very clear:

• Stocks = you own a part of the company; profits fluctuate with the company’s earnings
• Bonds = you are a creditor to the company; receive fixed interest regardless of profit or loss

Hidden risks in bonds – don’t miss out

Many investors think bonds are safe, but in reality, they carry various risks:

1. Default risk – if the issuer defaults before maturity, you may not get your principal back at all

2. Interest rate risk – if you buy a bond with 4% interest and the global interest rate rises to 7%, you’ll regret being stuck with the original rate

3. Liquidity risk – bonds are not always traded on stock exchanges; if you need to sell quickly, you may have to rely on intermediaries to find a buyer

4. Inflation risk – if inflation rises by 8% but your bond pays only 5%, your purchasing power is effectively lost

5. Reinvestment risk – when your bond matures, if market interest rates have fallen, you may face difficulties finding new bonds with attractive yields

Types of bonds – which one should you choose?

The Stock Exchange of Thailand offers many bonds:

By issuer:

• Government bonds (most secure but lowest returns)
• State enterprise bonds (safer than private corporate bonds)
• Private corporate bonds (offer better returns but are riskier)

By interest payment method:

• Fixed interest (regular cash payments)
• Zero-coupon bonds (no interest until maturity)
• Non-interest bonds (buy low, sell at maturity)

By interest rate type:

• Fixed-rate (know the amount in advance)
• Floating-rate (interest fluctuates based on reference rates)

How to calculate bond returns

A simple example: you buy a coupon bond with a face value of 10,000 THB, an 8% annual interest rate, paid twice a year, for 4 years.

• Interest per payment = 10,000 × (8% ÷ 2) = 400 THB
• Annual interest = 800 THB
• Total interest over 4 years = 3,200 THB
• Total amount received back = 10,000 + 3,200 = 13,200 THB

Buying and selling bonds – easier than you think

Primary market – buy directly from the issuer (company or government) through banks or financial institutions. You must purchase during the initial offering.

Secondary market – buy and sell bonds that have already been issued. In Thailand, the BEX (Bond Electronics Exchange) provides liquidity. Open an account with a securities firm, and you can trade bonds like stocks. Bonds are stored at TSD (Thailand Securities Depository).

Is investing in bonds in 2024 a good idea?

Advantages:

• Wide range of durations (1 day to 20 years)
• Steady cash flow, better returns than regular deposits
• Lower risk than stocks, as creditors have priority over shareholders
• Moderate liquidity from the secondary market

Disadvantages:

• Returns are much lower than stocks, even with reduced risk
• Still carry risks of default, inflation, and interest rate changes
• Analysis can be complex (requires understanding issuer’s financial health and market interest rates)

Bonds vs stocks – which is better for you?

Choose bonds if:

• You are older and prefer stability
• You want regular income
• You cannot tolerate volatility

Choose stocks if:

• You are young and have time
• You accept higher risk
• You seek higher returns

Balance = choose both – this is a good asset allocation strategy to reduce risk and prevent significant drops in returns.

Summary

Bonds are not necessarily a “losing” investment compared to stocks, but rather a “different type” suited for different investors. In 2024, with the financial markets full of uncertainty, having a “shield” like bonds in your portfolio might be a smart move.

The key is to study each bond type, understand the risks, and match them with your needs and current situation. Whether bonds or stocks, the important thing is to make informed choices and have a plan.