Drew O’neil discusses fixed income market conditions and offers insight for bond investors.
Take a Look at Me Now – Bond Yields Merit More Than a Glance
For many investors, the fixed income allocation in their portfolio represents a ballast to the more risky, albeit essential growth assets. Fixed income can embody stability through some of the known attributes associated with its structure. For instance, once purchased, market volatility, geopolitical events, pandemics, supply/demand factors, etc., on any level are completely irrelevant. By that I mean they do not affect the known cash flow, known income or specific date when an investor’s face value will be returned if an investor holds their bond to maturity. Now I’m typically supposed to insert the fine print that is associated with today’s litigious society. Unlike the small print we have become callus to on prescription drugs, electronic purchases, TV ads or mortgage documents, I can spell bond risks in big letters. They are important to understand and relative to understanding why fixed income can really create balance with more risky assets that bring the possibility of much larger returns as well as much larger losses.
Any investment can default, including a bond. That is, an issuing municipality/corporation becomes insolvent and is unable to pay its debtors. So here’s the disclaimer: “barring a default”. The types of bonds that you typically build your core fixed income portfolio with, are highly rated (investment grade) and unlikely to default but certainly not guaranteed. The default rate on investment grade municipal and corporate bonds are very low (0.09% municipal and 2.17% corporate investment grade 10yr cumulative default rate average 1970-2021 – Moody’s Investors Service). Treasuries and CDs are government backed. Agencies and mortgage-backed securities have implied government backing.
The other event that can derail known cash flow, income and return of full face value occurs when selling your bond prior to its maturity. If sold prior to maturity, a bond’s return is dependent upon the prevailing market price, which could be up or down from the purchase price. As an investor in individual bonds, you have one hundred percent control of this event.
Now the fun stuff. Here is why we are so excited about bonds today. The chart (right) exhibits yield comparisons from the end of last year to the present. The yields, and therefore improved income levels provided to investors, on top of their principal protection properties, speak for themselves. This is why bonds and your fixed income allocation merit special attention
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 Securities Industry and Financial Markets Association’s Project Invested website and Investor Guides at www.projectinvested.com/category/investor-guides, FINRA’s Investor section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.