7 Major Bond Investing Risks In A Weak US Economy

1. Less Liquidity – In a weak US economy one of the best bond investing strategies will take into account any drop in liquidity. During a weak economy interest rates and inflation are typically very low, and this also lowers the demand for bonds of all types. This means less liquidity, and some bond investors may have a difficult time finding a buyer. Less liquidity may mean a longer time before a buyer can be found so that the investor can sell the bond.

2. Default - All bonds are held to the US Treasury Bond standard. While it is very doubtful that the US Government would ever default on bond payments, the same cannot be said of some companies and municipal entities. Usually the higher the risk of default a bond has, the better the return on the investment, but with a weak US economy even companies and municipal authorities that seem like a sound investment can default.

3. The Call Risk Involved – If the bond in question has a call provision then there is a risk of this provision being activated. For bond holders who have paid a premium this can mean a loss of investment return. When interest rates start to decline, a company or municipal entity may choose to call the bond and force a payoff, so that less interest is owed on the bond. Some bond investing strategies consider the call risk while others simply avoid bonds with this provision.

4. Bankruptcy – Bankruptcy is a very real possibility when the US economy is weak. Consumers do not buy as much and prefer to hold on to their money instead, and this can affect the bottom line of business and government both. Higher unemployment rates mean fewer taxes for government entities, and less profit for companies as well. Some cities and municipalities have declared bankruptcy in the last few years, and many businesses have also sought this protection as well.

5. Bond Credit Rating Downgrades – Few bond investing strategies consider the risk of a credit downgrade, but as recent events have shown even the US government and foreign governments are not immune from this action. If the bond issuer suffers a credit downgrade then the bond will not be as attractive to other investors, and may need to be sold at a lower return than previously believed.

6. Reinvestment Risks – When a bond matures and the investor wants to reinvest the capital in the bond market it is typically done at lower interest rates if the US economy is weak. This can mean a loss on the expected return when the capital is reinvested. If the interest rates are too low than many investors may choose not to risk the capital at all, and may simply hold onto it instead.

7. Changes in Legislation – One thing that few bond investing strategies can predict is changes in legislation. This can come in the form of changes in the tax code, changes in the regulations or requirements for the bond market, and many other changes as well. A weak US economy increases the risk that there will be new laws or regulations that affect bond holders and others in the investment sector.