Bonds
A bond is a debt security where an investor lends money to a company or government and receives predictable interest payments. Unlike stocks, bond returns are known in advance (if the issuer doesn't go bankrupt). For immigrants, bonds are a tool for reducing portfolio volatility in the Ladder phase, but not a priority in the Boat phase.
How Bonds Work
Bond mechanics:
- You buy a bond at face value (e.g., €1000)
- The issuer (company or government) pays you interest — the coupon (e.g., 3% annual)
- At maturity, you receive the principal back
Key difference from stocks: return is known in advance. Stocks can rise 100% or fall to zero. A bond will deliver 3% per year — if the issuer doesn't go bankrupt.
Why Add Bonds to a Portfolio
Bonds serve three functions:
- Reduce volatility — when stocks drop 30%, bonds drop less (or rise)
- Predictable income — fixed interest payments
- Capital preservation — when approaching a goal (home purchase, retirement), move part of money from risky to stable assets
Psychological note: For immigrants who've experienced defaults and devaluations, bonds feel like "the same thing as before." The structural difference — German government bonds (Bundesanleihen) are backed by a stable eurozone economy and legal system [1].
Types of Bonds
| Type | Issuer | Credit Rating | Default Risk | Typical Yield (2025) |
|---|---|---|---|---|
| Government (Bundesanleihen) | Germany, EU countries | AAA–AA | Minimal | 2–3% annual [2] |
| Corporate Investment Grade | Large companies (Siemens, BMW) | BBB and higher | Low | 3–4% annual |
| High Yield | Companies with low ratings | BB and below | Elevated (up to 10% default probability over 10 years) [3] | 5–8% annual |
Bundesanleihen — German government bonds, considered one of the world's safest assets. Low yield, but virtually zero default risk [4].
Investment Grade — bonds of companies with stable financial positions. Ratings assigned by agencies (Moody's, S&P, Fitch).
High Yield — high-yield bonds of companies with elevated bankruptcy risk. Higher yield, but some issuers won't repay debt.
How to Invest in Bonds
Through Bond ETFs
For most investors, the optimal path is bond ETFs. Low entry threshold (from €25), automatic diversification (hundreds of bonds in one fund), low costs.
Examples of bond ETFs:
| Bond Type | Example ETF (not a recommendation) | Annual Fee (TER) |
|---|---|---|
| Eurozone government bonds | iShares Core € Govt Bond UCITS ETF | 0.07% |
| European corporate bonds | iShares Core € Corp Bond UCITS ETF | 0.20% |
| Global bonds (world basket) | Xtrackers II Global Aggregate Bond UCITS ETF | 0.10% |
Fee data current as of January 2025 [5]. ETFs trade through regular brokers (Trade Republic, Scalable, ING) just like stocks.
Buying Individual Bonds
You can buy bonds directly through a broker (e.g., Bundesanleihen through Deutsche Finanzagentur). Requires capital from €1000 per bond, need to track maturity yourself, reinvest coupons.
When direct purchase makes sense:
- Capital from €50,000 (for diversification across 10+ issuers)
- Specific goal with exact date (e.g., mortgage payoff in 10 years)
- Desire to lock in yield to maturity
For portfolios under €50,000, ETFs are more efficient — lower entry threshold, automatic diversification.
When to Add Bonds to Portfolio
Phase Logic (Boat → Island → Ladder)
Boat Phase (0–24 months): bonds are not a priority. First — emergency fund (Tagesgeld), then — start investing in stocks. Adding bonds at the "€5000 in ETF" stage reduces long-term returns without substantially reducing risk.
Ladder Phase (2+ years, capital from €30,000): bonds begin to play a stabilizing role. When you already have a base in stocks, adding bonds reduces portfolio drawdowns.
Criteria for Adding Bonds
| Criterion | Description |
|---|---|
| Investment horizon | If money needed in 5 years, bond allocation 40–60%. If in 20 years — can be 0–20% |
| Psychological resilience | If 30% portfolio drawdown causes panic and selling — add bonds now |
| Age and proximity to goal | 5–10 years before retirement or major purchase — gradually increase bond allocation |
Outdated Rule "Age = Bond Allocation"
Classic formula: 30 years old → 30% bonds, 50 years old → 50% bonds. This rule was created in the 1980s when bonds yielded 8–10% annual and life expectancy was shorter.
Why it's outdated:
- Bonds in the 2020s yield 2–3% annual (after inflation often zero)
- Average life expectancy increased — investment horizon is longer
- For immigrants at 35 with 30-year horizon, holding 35% in bonds means losing tens of thousands of euros in returns
Modern approach: bond allocation depends on goal, horizon, and psychology, not age.
| Horizon to Goal | Typical Bond Allocation |
|---|---|
| 20+ years | 0–20% |
| 10–20 years | 20–40% |
| 5–10 years | 40–60% |
| Under 5 years | 60–80% (or Tagesgeld/Festgeld instead of bonds) |
Bond Risks
Bonds don't equal "safety." They're less volatile than stocks but carry their own risks.
Interest Rate Risk
Mechanics: when interest rates rise, bond prices fall. If you bought a bond with 2% coupon and rates rose to 4%, your bond is worth less (new bonds are more attractive).
Example: In 2022, ECB raised rates from 0% to 4%. ETFs on European government bonds fell 15–20% [6].
Protection: if you hold a bond to maturity, you'll receive face value regardless of price fluctuations. Interest rate risk is critical only for early sale.
Credit Risk
Mechanics: issuer went bankrupt and didn't repay debt. For government bonds of developed countries (Germany, USA), this risk is close to zero. For corporate bonds — it's real.
Example: default probability for bonds rated BBB (lower boundary of Investment Grade) is about 2% over 10 years [7].
Protection: diversification (ETF instead of one bond), choosing issuers with high ratings.
Inflation Risk
Mechanics: if a bond yields 3% annual and inflation is 4%, real return is negative (−1%).
Historical context: In 2010–2020, European government bonds yielded 0–1% annual with 1–2% inflation. Real returns were close to zero or negative.
Protection: inflation-linked bonds or diversification into stocks for long-term goals.
Alternatives to Bonds
For short-term goals (1–5 years), instead of bonds it's often more efficient to use:
| Instrument | Description | Yield (2025) | Liquidity |
|---|---|---|---|
| Tagesgeld (savings account) | Money available anytime | 2.5–3.5% annual [8] | Instant |
| Festgeld (fixed deposit) | Money locked for term (1–5 years) | 3–4% annual [9] | None (until maturity) |
| Money Market ETF | ETF on short-term bonds and deposits | 3–3.5% annual | High (sell in 1 day) |
Advantage over bonds: no interest rate risk. If rates rise, Tagesgeld/Festgeld will yield more. Bonds will fall in price when rates rise.
When bonds are better: if horizon is 5+ years and you want to lock in yield now (e.g., buy 10-year Bundesanleihen at 3% annual and hold to maturity).
When to Consult a Financial Advisor
Bonds are a relatively simple instrument for self-study. Financial advisor consultation may be needed if:
- You're building a portfolio from €100,000 and considering buying individual bonds (not ETFs)
- You need a strategy for gradually reducing risk before retirement (glide path)
- You're considering bonds with currency risk (e.g., US Treasuries in dollars)
For portfolios under €50,000, bond ETFs through a regular broker are a sufficient solution without need for paid consultation.
Sources
- Deutsche Bundesbank. (2024). German government bonds (Bundesanleihen). Retrieved from https://www.bundesbank.de/en/tasks/money-market-and-capital-market/german-government-bonds
- Deutsche Finanzagentur. (2025). Current yields on German federal securities. Retrieved from https://www.deutsche-finanzagentur.de/en/institutional-investors/primary-market/yields/
- Moody's Investors Service. (2024). Annual Default Study: Corporate Default and Recovery Rates, 1920-2023. https://www.moodys.com/
- Fitch Ratings. (2024). Germany Long-Term Issuer Default Rating. https://www.fitchratings.com/
- TER data for ETFs obtained from issuer websites (iShares, Xtrackers), January 2025.
- European Central Bank. (2024). Key ECB interest rates. https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/
- S&P Global Ratings. (2023). Default, Transition, and Recovery: 2023 Annual Global Corporate Default And Rating Transition Study. https://www.spglobal.com/
- Finanztip. (2025). Tagesgeld-Vergleich. https://www.finanztip.de/tagesgeld/
- Stiftung Warentest. (2025). Festgeld im Test. https://www.test.de/Festgeld-im-Test-1089009-0/