For those seeking a steady second income, the bond market provides a range of options to generate typically reliable returns. Bonds are essentially loans made to governments or companies, with investors receiving regular interest payments — known as coupons — and the original sum back at maturity.
However, bonds are traded and this means the price and yield moves. The yield’s the annual return as a percentage of the bond’s current price. And it moves inversely to price. As prices fall, yields rise, and vice-versa.
Generating a bond market second income
I believe that a carefully chosen portfolio of stocks is the best way to achieve financial success. In 2024, when my portfolio doubled in value, only a couple of my 25 or so holdings were bonds.
But currently, bond yields are elevated. This reflects the higher interest rate environment but also increased risk that government may not be able to service all their debts. But for those who believe this risk’s overplayed, the bond market’s full of opportunity.
To generate a £5,000 second income from a £100,000 portfolio, an investor needs an average yield of 5%. A diversified approach would mix different durations and geographies.
For example, US three-month Treasuries currently yield 4.36%, US 10-year Treasuries yield 4.45%, and US 30-year Treasuries yield 4.89%. Meanwhile, UK 10-year gilts yield about 4.2%. And South African 10-year government bonds offer a notably higher yield, recently around 10.3%.
A sample allocation might be £30,000 in US three-month Treasuries at 4.36%, £30,000 in US 10-year Treasuries at 4.45%, £20,000 in UK 10-year gilts at 4.2%, and £20,000 in South African 10-year bonds at 10.3%. This blend would generate about £1,308 from short-term Treasuries, £1,335 from US 10-year Treasuries, £840 from UK gilts, and £2,060 from South African bonds, totalling £5,543 before fees or taxes.
An easier option
Given these risks, a bond fund can be a sensible entry point. Funds like the iShares Core US Aggregate Bond ETF (NYSEMKT:AGG) offer broad diversification across maturities and sectors, reducing the impact of any single bond’s price movement.
The fund tracks the Bloomberg US Aggregate Bond Index and includes a mix of government, corporate, and mortgage-backed securities, with an average duration of about 6.5 years. It currently yields around 3.8%, providing a stable income stream while spreading risk across hundreds of bonds.
For investors wary of making a big bet on long-duration government debt, a diversified bond ETF like this one can offer a balanced approach, cushioning against volatility and policy surprises while still capturing attractive yields in today’s market.
However, it’s very US-focused. That may be a concern for some investors. It’s certainly worth considering however. I’m taking a closer look myself.
An even more diversified option would be Warren Buffett’s Berkshire Hathaway which has significant exposure to bonds and fixed-income instruments. Berkshire Hathaway’s now one of the largest holders of US Treasury bills, controlling nearly 5% of the entire short-term Treasury market. That’s about $314bn as of March.
This vast position surpasses even the Federal Reserve’s Treasury bill holdings and reflects Buffett’s preference for safety and liquidity amid high equity valuations and economic uncertainty. This is one I’ve been buying, and I also believe it’s worth further research.
