Many investors see investing in the fixed-income marꦗket as a way to preserve capital. The irony is that there are a variety of way💧s of losing money on bonds—some well-known and others not so much.

Here we attempt to survey the leading causes of loss, both literal and in terms of real return so that y💞ou can learn to avoid potential problems and better prepare for the inevitaಌble ones.

1. Trading Losses

Losing money is easy if you're buying and selling bonds as a trader. 🍬Here are the principal ♊ways that playing with fixed-income securities can cause you to bleed cash.

Interest Rate Moves

As all bond traders know, when rates go up, bond prices fall. If you haven't read the rate climate effectively, you're going to get hurt. This is probably the single greatest source of trading losses in the market.

Credit Downgrades

A couple of bad quarters or a punishing one-time event can force rating agencies to consider 澳洲幸运5开奖号码历史查询:downgrading the creditworthiness of a borrower. Should even a single notch be chipped from an issuer's credit rating, its bonds 🌃wiꦫll take a significant hit.

Restructurings/Corporate Events

When companies are merged or bought out, their entire capital structure can change overnight. Changes in corporate structure could leave bondholders facing everything from 澳洲幸运5开奖号码历史查询:a steep loss in bond value to a big, fat nothing on their investment.

Some questions around a 澳洲幸运5开奖号码历史查询:restructuring may include:

• What sort of financial shape the companies are in
• What the 澳洲幸运5开奖号码历史查询:prospectus of the former bond stipulated
• What the new agreement mandate is

Liquidity-Related Losses (Wide Trading Spreads)

For the most part, fixed-income products trade 澳洲幸运5开奖号码历史查询:over the counter (OTC), meaning there's not always a lot of visibility in certain issues. You will not have access to all the relevant pricing information—specifically, information about the all-important 澳洲幸运5开奖号码历史查询:bid-ask spread. If the spread i🌱s particularly wide, you could run into trouble.

For example, you might buy ABC Company's bond for $96 when its bid-ask spread was $88-$96 and then sell it a month later when it had appreciated and the bid-ask was $95-$103. But the price you are able to sell at is $95, or a dollar less than your initial purchase price. The wide spread, in this case, suggests that your trade was generally correct, but you lost where it counted in terms of it being a relatively illiquid market.

2. Inflation

Your next opportunity to lose money comes from 澳洲幸运5开奖号码历史查询:inflation. Very briefly, if you're earning 5% per year in your fixed-income portfolio, and inf♐lation is running at 6%, you're losing money. It's as simple as that.

Treasury inflation-protected securities (TIPS), called "real return bonds" for Canadian investors, are supposed to be the answer to thaꦬt inflation issue. Uꦫnfortunately, there are still several distinct ways to lose money on these investments.

Deflation

This is not an everyday occurrence but certainly a possibility. Because of the way values on TIPS are calculated, an extended period of deflation could return you less c♚ash on maturity than you originally invested. Your🤪 purchasing power might be intact, but you would emerge with less than a regular bond would have paid you.

Consumer Price Index

Changes in the calculation of the 澳洲幸运5开奖号码历史查询:Consumer Price Index (CPI) could also bring losses. Again, not a daily occurrence, bu🍬t it has been done and new methods of calculation are regulꦇarly being tested and promoted to result in a reduction in your TIPS' value.

Taxation

Finally, TIPS are taxed on both the yield and capital-appreciation (CPI-linked) portions of the bond. It's quite possible that high bouts of inflation would trigger significant tax bills that would render the bond's real yield lower than the rate of inflation. 澳洲幸运5开奖号码历史查询:Tax-sheltered accounts are🌺 therefore best for holding these instruments.♉

3. Bond Funds

There are two distinct ways to lose on b🐼ond ⛄funds.

Redemptions

Should there be a large call to redeem from the fund (on a popular manager's departure, suspicion of corruption, etc.), management might be forced to sell off significant holdings to pay out investor🎐s. Should these issues be illiquid, both the fund and investors would realize losses. In some instances, rede💜mption fees might also add significantly to losses.

Poor Asset Management

Losses in funds are more commonly the result of overly aggressive managers chasing after yield from lower-quality issues, which then default. In addition, actively managed funds tend to charge higher fees and cre🌌ate a larger number of taxable events.

4. Foreign Bonds

Here are four exciting ways to lose your hard-earned income investing in 澳洲幸运5开奖号码历史查询:foreign-bond issues.

Exchange Controls

Your foreign-bond-issuing nation decides to impose 澳洲幸运5开奖号码历史查询:exchange controls; governmental limitations on the purchase and/or sale of currencies. No money can leave the country.✨

Currency Rate Fluctuations

The 澳洲幸运5开奖号码历史查询:exchange rate between your bond-issuing nation and your own takes a turn for the worse. You will vඣery quickly lose (a lot) of money. The same goes for rising interest rates in that foreign country. Bond laws are universal: The price of your bond will drop as rates rise.

Foreign Taxation

Some friendly foreig🐓n-bond-issuing nations have not-so-f𒊎riendly tax regimes. You may end up with a lot less once the local (foreign) tax man bites. If you come away with lower yields than inflation, again, you lose.

Nationalization

If you're searching for yield in far-off lands, chances are you'll encounter countries where the government can legally take over businesses by decree. When this happens, you will experience firsthand how rating agencies and the markets feel about nationalization (hint: Th🔯ey don't feel good). And that's assuming the corporate bond's obligations aren't immediately declared null and void by the government.

5. Mortgage-Backed Securities

澳洲幸运5开奖号码历史查询:Mortgage-backed securities (MBS) are collateralized by the monthly mortgage payments of John Smith. When he runs into personal financial problems, or when the value of his house deprecia𝄹tes significantly, he may default on his mortgage. If enough neighbors join him, your MBS will lose a great deal of value and likely a good deal of liquidity. When you finally decide to sell it—if you can sell it—you wil﷽l lose money.

This is what happened, to the tune of billions of dollars' worth, in the subprime mortgage meltdown of 2008-09.

6. Municipal Bonds

Here are three ways to lose with municipal bonds, also known as "munis."

Tax Decreases

Yes, that's right, decreases. Municipal bonds are generally valued for being exempt from federal taxation—and often from state and 澳洲幸运5开奖号码历史查询:local taxes. So long as those taxes are significant, there's an advantage to buying munis. But when tax rates decline, so too does the value of holding municipals, along with their prices.💧

Changing Regulations

In order to maintꦐain their tax-exempt status, securities like municipal bonds also have to adhere to demanding legal requirements. But laws change regularly, and so, too, does the status of municipal-bond issuers. Should this occur, your muni will be repriced against similar, higher-yielding (and lower-priced) issues.

For example, municipalities sometimes (though not often) have their 澳洲幸运5开奖号码历史查询:credit ratings downgraded after agencies decide that a recent budg🌠et contains imprudent spending or an investment portfolio has suffered significant losses. A downgrade might also occur if the company that is insuring the bond loses its AAA rating.

Private Issuers

Finally, beware of private companies or organizations that issue municipal bonds under the name of the municipality in which they operate (for example, an airline selling a municipal bond to build a new terminal). Even though the bonds received AAA municipal ratings, the 澳洲幸运5开奖号码历史查询:guarantors were 澳洲幸运5开奖号码历史查询:private companies—and when and if these coꦯmpanies happened to default, the bond goes under🌳.

7. Certificates of Deposit

Admittedly, these are exactly the same as bonds, but since they often serve the same income purpose in a portfolio, we're including them. Cashing in your 澳洲幸运5开奖号码历史查询:certificate of deposit (CD) early (where permitted) may trigger a penalty. Whওen this penalty is netted out against accrued interest and inflation, chances are pretty good you'll lose money.

The Bottom Line

Can you lose money on bonds and other fixed-income investments? Yes, indeed; there are far more ways to lose money in the 澳洲幸运5开奖号码历史查询:bond market than people imagine. The good news is that, if you know the most common causes of losses, you can avoid them, you will be better able to avoid these financial misfortunes be🦹fore they ꧃occur.