^{Building Wealth} Balancing risk and securing returns through bonds investing

While investor attention is often focused on equity markets and stocks, bond markets offer a more nuanced risk-return dynamic and are often better indicators of the health of the global economy. Bonds are also often misunderstood, yet they play a vital role for investors by helping balance portfolios and offering income and investment diversification.

The different types of bonds

There are many types of bonds. Fundamentally, they are structured commitments by borrowers to repay lenders over time with interest.

Each of these bonds serves a different purpose and caters to investors with varying risk appetites, financial goals and time horizons.

Understanding credit ratings

Global agencies such as Standard & Poor’s (S&P) Global Ratings, Moody’s Investors Service and Fitch Ratings assess the financial health of companies and bond issuers using financial and non-financial data, including management interviews. The goal is to provide a benchmark for investors to assess the creditworthiness of an issuer or issuance.

Credit ratings are the outcome of these assessments. For example, U.S. Treasury bonds and those issued by developed countries like Canada and Germany are considered “safe” or “highly rated” due to their fiscal strength and strong track record of repayment.

Safer bonds typically offer lower yields than riskier bonds issued by entities with weaker credit histories or limited track records.

The key role of bonds in managing risk

The relative safety of bonds makes them a useful counterbalance to equity markets. While stocks generally offer higher returns (from 1997 to 2024, the S&P 500 returned an annualised average of 9.7%, compared to 4.1% for the U.S. Aggregate Bond Index, bonds help reduce portfolio volatility. They also play a crucial role in capital preservation during periods of market downturn.

Overview of the global and UAE bond markets

The global bond market stands at approximately U.S.$130 trillion, surpassing the global equity market valued at around U.S.$110 trillion. The U.S. Treasury market alone represents a significant portion of global bond issuance.

The United Arab Emirates (UAE) is one of the largest U.S. dollar bond issuers in emerging markets (excluding China), accounting for 8.9% of total issuance in 2024, second only to Saudi Arabia (17.4%) and Brazil (9.4%), according to Fitch Ratings. The UAE’s bond market is projected to exceed U.S.$300 billion by mid-2025.

Recent reforms in the UAE are improving market access and transparency. Initiatives such as the listing of local currency bonds on Nasdaq Dubai and efforts to deepen the dirham-denominated bond market are making it easier for investors to participate. As the UAE positions itself as a regional financial hub, particularly in sustainable and green finance, its bond market is expected to grow in both size and sophistication.

What to consider when investing in bonds

Bonds can play a crucial role in an investment portfolio. Depending on your risk appetite, bonds could account for 10% to 60% of your overall investments. A general rule of thumb is to allocate 10–20% in your 30s, 20–30% in your 40s, and 30–50% in your 50s to protect accumulated wealth as you approach retirement.

Here are four important questions to ask a financial adviser before investing in bonds:

1. What role will bonds play in my overall portfolio strategy?
2. What are the credit risks and other risks associated with the bonds you are recommending?
3. How sensitive is the bond to interest rate changes?
4. What are the costs, tax implications and liquidity considerations?

The answers will help determine how bonds can support your long-term financial strategy.

To learn more, please contact your certified Relationship Manager.

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