Bonds have performed unexpectedly well this year, with the Barclays U.S. Aggregate bond index returning 3.7 percent so far this year through Monday.
But that doesn't mean there aren't risks involved in holding bonds, and
CNBC lists several of them. Here are five.
1. Interest-rate risk. Most economists expect rates to rise in coming months, and that would mean the value of your bonds would fall.
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2. Bond-fund risk. If you hold individual bonds, you don't have to worry about declines in their price. That's because you can simply hold them until maturity and get your principal back, as long as your bonds don't default. But with bond funds, when your share price falls, there's no guarantee it will ever rebound to your purchase price because the securities they hold mature on a staggered basis.
3. Credit risk. That's the risk that your bonds will be downgraded or default.
4. Liquidity risk. That's the risk that your bonds will be difficult to sell in times of turmoil.
5. Inflation risk. If inflation rises, which is likely in coming months, that lessens the value of your interest payments and principal.
"Average investors are simply out there buying yield, and they don't care whether they're getting it from owning lower-grade fixed-income products, dividend stocks or master limited partnerships," Dan Veru, chief investment officer of Palisade Capital Management, tells CNBC.
"I don't think they have a clue about the risks involved."
Some experts wonder whether bonds are now overvalued. "The most important question at any point in time is whether to emphasize offense or defense," Howard Marks, chairman of Oaktree Capital Group, tells
The Wall Street Journal. "This is a time for caution."
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