Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
Unrest resonates worldwide. The U.S. strikes nuclear sites in Iran. Israel targets key military strikes on Iran. Iran vows retaliation against the U.S. and promises to keep attacking Israel. The Gaza war between Hamas and Israel has been active for more than one and a half years. Russia and Ukraine have been fighting since February 2022. All of these recent conflicts are creating global instability.
There are numerous potential outcomes and consequences to these conflicts, and varying opinions about the implications of these events are all quite plausible. Pressing military operations can lead to unstable oil prices, increased inflation, and eroded consumer confidence, resulting in investor inaction or a shift to safer investments. Iran is threatening to close the Strait of Hormuz, where roughly one-fifth of the world’s oil traffic passes. Equity futures and oil prices are reacting to the news.
If you have an opinion, it is not difficult to find articles or pundits backing it. The only probable truth is that no one knows how all of this will play out because it is impossible to predict leadership actions and the consequential consumer behaviors that result. Volatility in the markets, however, is easily explained.
Focus on what we do know. The easiest way to illustrate this is by examining the recent history of interest rates. For the last two years, investors have had access to interest rates not seen since 2007. During this period of volatility and uncertainty, interest rates have remained elevated, offering investors the opportunity to secure a dual benefit in fixed income. Fixed income helps preserve wealth in any interest rate environment, but in this one, it also can provide considerable income.
There are many available options to lock into higher income levels with fixed income for longer. There is no guarantee how long this opportunity will last or whether it will get better or worse. Rather than get caught up in the volatility and prognostication of where interest rates are headed, focus on where interest rates are. Rates are elevated and boast income levels that match the last two decades' best.
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.
