It's not too late
Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
Every week, this platform is used to highlight current ideas, fixed-income concepts, economic occurrences, and/or clarify a strategic fixed-income feature. The cohesive topic threads are fixed-income issues relevant to current market conditions. Our latest Commentaries featured working strategies, why anchoring bias can be influential, fixed income’s reliable performance, and the dual benefit that fixed income provides investors. I’m recapping these topics to emphasize that it is not too late to strategically shore up the fixed-income foundation by taking advantage of market conditions that have taken nearly two decades to surface.
When it comes to investing, human nature can lead us to form a bias that rates will return to or exceed recent peak levels. The reality is that no one can predict the direction of interest rates with certainty because there are so many ever-changing variables that influence them. Pinpointing absolute highs or even lows is an inexact practice that can mislead strategy. It is essential to separate this from the market's “known” characteristics. That is, elevated rates have hovered for the past two years at levels not seen in the 15 years before those two. The bottom line is that interest rates remain elevated compared to the most recent two decades.
Another “known” of fixed income is that, barring an outright default, holding an individual bond to maturity produces a known income, a known cash flow stream, and a known date when the bond’s face value is returned to the investor. These characteristics, combined with high-quality, investment-grade underlying credits, put individual bonds in a unique category with lower risk than many other security types. Individual bonds can serve to balance an investment portfolio’s exposure to more price-volatile assets and help preserve accumulated wealth. This characteristic exists in an eternal “it’s not too late” state since it is essential regardless of whether the economy is in a one percent or 10 percent interest rate environment.
“It’s not too late” directly applies to the current bond market, from which individual bonds have the dual benefit of preserving wealth and providing investors with elevated interest rate opportunities. Helping to preserve wealth does not come at the expense of income opportunities since investors can obtain attractive yields. Since the corporate curve and, in particular, the municipal curve are displaying steep slopes, investors are rewarded for extending out on the curve. Although this increases interest rate risk, it reduces reinvestment risk and provides a locked-in-for-longer income stream.
It is also not too late to capture real estate, stock, or any other asset’s appreciation and reinvest those proceeds into individual bonds. Not only can this help reduce risk factors, but it can also maintain an attractive yield level while helping to preserve capital. Treasury yields will continue to fluctuate as investors digest the latest economic data, geopolitical events, or consumer information. Despite all the volatility and market tweaks, individual bonds continue to highlight a dual benefit opportunity… It’s not too late!
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.
To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.
