“Stocks spark the imagination; bonds win you over with math”
When a stock crashes, many people console themselves with the phrase “it’ll bounce back.” Sometimes that’s true, sometimes it isn’t. Bonds work differently: they have a built-in “bounce-back” mechanism—as long as the issuer survives. Ali Masarwah, CEO of the consulting firm envestor, explains the magic of the “pull-to-par” effect.
April 20, 2026. FRANKFURT (envestor). Stocks are considered the gold standard of investing: theoretically unlimited profit potential, a stake in productive capital, and protection against inflation. All true—except that this narrative overlooks the fact that many investors often struggle for a long time during market corrections. Or they exit at the wrong time because the uncertainty is too great for them.
There is no obligation to make amends on the stock market. Many investors use their entry price as the “anchor” for their expectations, but whether and when these will be met is another matter entirely. An extreme example: Anyone who entered the Japanese stock market at its peak in 1990 had to wait 34 years for the Nikkei 225 to reach its previous level again. Note that this applies to the index, not to the many individual stocks that disappeared from the ticker along the way.
Bonds work differently. A typical bond is issued at a fixed price—usually 100 percent—and repaid at exactly that price at maturity, even though the price may fluctuate along the way as interest rates and risk premiums change.
Bonds and stocks have certain similarities. If prices fall from 100 to, say, 80, both securities need to rise by 25 percent to return to 100. The difference: With a stock, it’s anyone’s guess whether and when the investor will see “100” again. With a bond, however, this jump is scheduled—the redemption date is contractually fixed, and the coupons are defined. As long as the issuer does not default, the “pull-to-par” effect takes hold: Over time, the price is “pulled” toward the redemption price. This also applies in reverse to bonds whose price trades above 100 during their term, as shown in the chart.
That’s the difference between voodoo and mathematics. Stock prices depend on expectations, sentiment, and what’s known as “price speculation.” With bonds, the upper limit is clear: the yield to maturity. Anyone who buys a corporate bond today with a 5 percent coupon at 80, which will be redeemed at 100 in five years, can calculate the annual return exactly. It comes to a solid 10.5 percent per year. That’s less spectacular than the hope of a tenbagger in stocks, but many investors are stressed out by the uncertain outlook for equities.
Risky, highly volatile bonds have comparatively short maturities. Governments sometimes borrow for 20, 30, or even 100 years; high-yield bonds in Europe are typically issued with maturities of four to six years and offer adequate coupons. Corporate bonds with a “B” rating must—depending on the market phase—pay risk premiums of 350 to 550 basis points above the risk-free rate.
So, should you go all-in on high-yield bonds? Be careful. Here, the creditworthiness of the issuers comes into focus. For relatively high-quality European corporate bonds with “BB” ratings, the historical default rate has been around one percent per year. That’s manageable. For bonds with “B” ratings, however, the rate has been as high as five percent. For “CCC”-rated securities, it has averaged around 20 percent over time. The typical high-yield fund or ETF therefore focuses primarily on “BB”-rated bonds. Only daring or experienced fund managers bet heavily on the “C-regions” of the high-yield market.
In portfolio practice, this does not mean that bonds replace stocks. Stocks remain the growth component without which long-term wealth accumulation is virtually impossible. But they are not a panacea. Bonds are attractive during periods of high stock valuations or for investors transitioning into withdrawal or retirement mode. The combination of (limited) yield and predictable payouts is often compelling for them.
By Ali Masarwah, April 20, 2026, © envestor.de
About the Author
Ali Masarwah is a fund analyst and managing director of envestor.de, one of the few fund platforms that offers cashback on fund sales fees. Masarwah has been analyzing markets, funds, and ETFs for over 20 years, most recently as an analyst at the research firm Morningstar. His expertise is also highly regarded by numerous financial media outlets in German-speaking countries.
This article reflects the author’s opinion, not that of the editorial staff at Deutsche Börse. The author is solely responsible for its content.
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