Bonds provide preservation of capital, income and portfolio diversification, reducing volatility relative to all-stock portfolios.  Bondholders earn interest payments in exchange for their loan to the borrowing entity—typically a government, municipality or corporation—in addition to the safe return of their principal upon maturity of the loan.  Because bond investors possess a priority claim on the issuer's assets in the event of default, they assume less risk than do equity investors.  Expected returns for bonds are, therefore, less than those of equities.  Many investors are willing to accept lower expected returns in exchange for the safety bonds provide.

Bond funds are frequently used for clients because their price efficiencies and diversification benefits often outweigh the lower costs associated with holding individual bonds.  Orion often uses bond index funds to minimize expenses and the risk of underperformance.

When taxable bonds are appropriate, we focus on bonds of the highest quality—those issued or backed by the U.S. Government.  In times of financial crises, U.S. Treasury bonds provide the greatest level of protection.  To enhance portfolio diversification and to protect against inflation, we add Treasury Inflation Protected Securities (TIPS).  Whenever possible, these bonds are held in clients' tax-deferred accounts.

When municipal bonds make sense for clients in high tax brackets, we build diversified municipal bond portfolios focusing on the after-tax yield and maturity of issues.  Because of the very low default rates on municipal bonds, laddered portfolios of five or more individual issues can be constructed to achieve adequate diversification.