Government bonds

Governments are by far the biggest bond issuers. They are generally reliable, have very very large amounts of debt (well beyond what any corporation would be able to borrow) and are able to easily issue bonds (except in specific cases such as Greece ). Government issue bonds in many different ways and at all levels (National, State, Municipal, etc).

Treasury : These are the bonds issued by the US governments. They usually a pay a fixed interest coupon every 6 months. There are a variety of ETFs that can be used to trade these but they often depend on the maturity you want to trade. More on that later on.

[table 135 not found /]

Municipal : Municipal bonds are issued by local governments and have specific tax incentives that give incentives to own these. They usually also offer higher yields because local governments are seen as more risky. A good mix between treasuries and municipal bonds is usually a good way to gain additional return.

[table 131 not found /]

Tips. These are government issued bonds that pay a floating interest. They are linked to inflation and pay more when inflation rises. Because of that, they are a good way for investors to hedge against inflation which can become a major worry for a lot of individuals especially when they are no longer earning income apart from their investments.

[table 130 not found /]

Corporate

Corporate bonds are issued by all kinds of corporations such as General Electric, Microsoft, etc. These companies pay coupons and can   range from the best and wealthiest companies to those already in bankruptcy.

Investment Grade : These bonds were issued by companies that have very little risk of default according to the rating agencies. They pay smaller yields but also have very limited risk. Some of these companies even pay less than the Federal Government.

[table 134 not found /]

High Yield : These bonds were issued by companies that have bad credit ratings and have a fairly high risk of default. They must pay very high yields to attract investors because of the higher risk associated with owning their bonds.

[table 136 not found /]

International Bonds

It is always surprising to hear investors get such good diversification in equities but not look for the same with bonds. Granted, it is more complex and costly, but the diversification is worth it in my opinion. There are few ETFs that fill this need but I would bet a lot that it will improve in the coming months

International Government Bonds: Foreign government often must offer much higher yields because of the risk involved. While bankruptcies can happen (Argentina and Russia were two major ones), a good fixed income portfolio should have some exposure to this sector.

[table 133 not found /]

International Corporate Bonds: Many large corporations in Europe and Asia do not issue bonds in the US which provides opportunities to get more diversification by buying not only local corporate bonds but also international ones.

[table 132 not found /]

Duration, Diversification, Ladder

Up until now, we have only looked at broad categories of bonds. More advanced investors would probably consider investing depending on the duration. The longer the bond has till maturity, the more sensitivity it has to interest rate movements (all other things being equal). Also, investors might have specific liquidity needs that will encourage them to look for bonds issuing near a specific date. For that reason, an increasing amount of ETFs focus on the categories described above but for specific target dates.

Here is an example of bonds ETFs offered by Claymore: