15 Things Smart Bond Investors Never Do

Bond investing seems straightforward, but there are costly missteps even seasoned investors make. Overlooking a few key details can lead to weaker returns or unexpected losses. Before you lock in your next purchase, here’s what savvy investors make sure to never do.

Chase High Yields Without Checking Credit Ratings

Chasing high-yield bonds might seem rewarding, but those attractive returns often come from issuers with weak credit. In 2008, many investors trusted AAA-rated securities that turned out to be toxic. Junk bonds can offer 7%, but the elevated default risk makes them a gamble.
More From The Penny Hoarder:Real Ways to Finally Get Out of Debt (Without Going Broke Doing It)

Skip Reading The Bond Prospectus

Call features, payment terms and hidden covenants matter. The fine print in a bond prospectus can save you from nasty surprises. Some bonds get pulled early, which reduces your returns. Others may allow issuers to defer payments you’re counting on for income.
Make money easier. Sign up for The Penny Hoarder’s newsletter today.

Ignore Duration And Interest Rate Sensitivity

Every bond has a duration, and ignoring it can be costly. A 10-year duration means a 1% rate hike could slash your bond’s value by 10%. In 2022, some long-term Treasury ETFs dropped nearly 39.2% as rising interest rates crushed prices.
More From The Penny Hoarder: 31 Ways to Make Money Online & From Home in 2025

Overlook The Tax Treatment Of Bond Income

Not all bond income is taxed the same. Corporate bond interest gets taxed federally, while municipal bonds might be tax-free in your state. For someone in the 35% bracket, a 5% muni bond matches a 7.7% taxable yield. Treasuries skip state tax.
More From The Penny Hoarder: 8 Ways Savvy Shoppers Are Outsmarting Inflation at the Grocery Store

Put Too Much In One Type Of Bond

Treasuries, municipals and corporate bonds behave differently during market shifts. Putting all your money in one bond category raises your risk. When recessions hit, corporates often fall while Treasuries may rise. A well-diversified mix keeps your portfolio steadier across conditions.
More From The Penny Hoarder: 17 Make-Your-Own-Schedule Jobs You Can Do From Home

Let Emotions Drive Bond Investment Decisions

Letting fear or greed lead your bond choices can do serious damage. In 2022, panic selling peaked just before rates stabilized, costing investors dearly. Emotional decisions tend to erode returns faster than taxes or fees ever could—discipline makes the difference.
More From The Penny Hoarder: Ditch Overpriced Car Insurance Now — Save $500 Today

Ignore Bond Laddering As A Strategy

Spreading out bond maturities using a ladder can make a big difference in uncertain markets. It reduces reinvestment risk, stabilizes cash flow and protects against rate swings. Retirees often prefer five-year ladders to match bonds with future spending needs.
More From The Penny Hoarder: Is InboxDollars A Legitimate Way To Make Money in 2025?

Forget To Reinvest Coupon Payments

Many brokers make reinvesting automatic. Those periodic interest payments can quietly supercharge your returns—if reinvested. Skipping reinvestment slows your portfolio’s growth over time. A 5% coupon reinvested could mean more than $60K in extra gains over 20 years.
More From The Penny Hoarder: How to Save Money on Groceries: 25 Tools and Tricks to Save $100 or More

Try To Time The Bond Market

Even seasoned professionals struggle to time interest rate changes correctly. Mistakes can lead to missed gains or unexpected losses. In 2023, the Fed shifted direction several times. Investors who stuck with a long-term plan generally saw more stable outcomes.
More From The Penny Hoarder: Is Solitaire Cash Legit?

Dismiss Callable Bonds’ Hidden Risks

Higher yields on callable bonds may look appealing at first glance. But issuers can call them back early, especially when rates fall, leaving you stuck reinvesting at lower returns. These risks often go unnoticed until your income stream is disrupted.
More From The Penny Hoarder: The 5 Top Apps for Saving Money in 2025

Rely Solely On Bond Funds Without Knowing The Risks

Bond funds may seem like a safe bet, but their value fluctuates daily. Unlike individual bonds, they offer no principal guarantee at maturity. During turbulent markets in 2022, some bond ETFs lost more than 15%, which caught many investors off guard.
More From The Penny Hoarder: The 28 Best Side Hustles: Our Top Picks to Help You Make More Money

Underestimate The Role Of Credit Agencies

The ratings assigned by credit agencies shape how bonds are valued and traded. A downgrade can wipe out gains quickly. Even the U.S. lost its AAA rating in 2011. Depending on one agency’s assessment alone adds unnecessary risk, so it’s best to check multiple sources.
More From The Penny Hoarder: Here’s How to Start Saving Money — Even If You Don’t Have Room in Your Budget

Ignore Liquidity When Choosing Bonds

Liquidity matters when markets turn volatile. Thinly traded bonds—like many municipals—can be hard to sell fast without taking a hit. In 2020, panicked investors found themselves stuck, unable to exit without losses. Treasuries generally offer more consistent daily trading volume.
More From The Penny Hoarder: Apps That Pay $100 a Day: 15 Apps That Pay Real Money

Skip Checking The Call Protection Period

The call protection window shields your income stream from early redemption. A bond callable in just three years exposes you to reinvestment risk far sooner than expected. Investors who skip this detail may be surprised when bonds are pulled prematurely.
More From The Penny Hoarder: Free Baby Stuff for Expecting Mothers in 2025 (38 Freebies & Deals!)

Assume Corporate Bonds Are Always Better Than Treasuries

Higher yields might tempt you toward corporates, but they come with default risk during downturns. Treasuries climbed while many corporate bonds dropped sharply in 2008. Uncertain times widen the credit spread, making Treasuries the steadier option despite their lower payout.
More From The Penny Hoarder: Get Your Finances Together This Year With One of Our Favorite Budgeting Apps