Bonds can be a good investment, providing cash flow when you need it and a strong series of interest payments. Even so, it is important to exercise caution when investing in bonds, especially during a recession. The movement of interest rates can cause a deterioration in the value of your bonds, and certain bonds could even fail if the companies that back them go out of business.
Watch the direction of interest rates during the recession. During periods of economic weakness, the government generally lowers interest rates to stimulate the economy. The direction of interest rates will affect the value of the bonds you hold. When rates are falling, the net asset value of a bond fund tends to rise, even as the amount of interest paid from that fund goes down.
Review any bond funds you already own to determine the average duration of the funds. Average duration is an important consideration for bonds in any environment, but it is especially important during periods of recession. It is important to keep the average duration of your bond funds short during a recession, since an increase in interest rates will cause a deterioration in the net asset value of the fund. Keeping the average duration under three to four years can protect you from this risk.
Keep your exposure to high-yield corporate bonds to a minimum as the country enters a recession. High yield bonds are also known as junk bonds because they carry ratings that are less than investment grade. While these bonds often provide superior yields, they can also be quite risky.
Diversify your risk if you plan to invest in corporate bonds during a recession. Using a bond fund that invests in corporate bonds is a good way to reduce your risk, since buying an individual corporate bond puts you at risk if the company is hit hard during the economic downturn.
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