A substantial collection of fixed income opportunities

Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

One of the advantages of individual bonds is the ability to custom-select bonds that fit individual needs and/or goals. Every investor is different in terms of age, willingness to take on risk, lifestyle, wealth accumulation, tax bracket, state of residency, and their vision of the future. For these reasons, different investments may be appropriate and may present the most towards achieving future goals. For many investors, bonds are purchased primarily to help preserve wealth; however, for the last ~1.5 years, bonds have delivered a dual benefit: preservation of wealth and high levels of income.

My associate recently dedicated this commentary to the yield benefits of intermediate to long-term municipal bonds. This holds particularly true for investors in the highest tax brackets since the tax-equivalent yields (the yield a taxable bond would need to be to equal the tax-free yield of a municipal bond) easily are north of 6% and often as high as 7%-8%. To put this in perspective, the average annual total return of the S&P 500 Index since the turn of the century is 7.4%. To accomplish close to or exceed growth-like returns in a less risky and more predictable municipal bond should capture investor attention. This isn’t a recommendation to replace growth assets with wealth preservation assets, but I want to highlight the dual benefit opportunity associated with solidifying your fixed income allocation of assets.

Many other opportunities exist. The Treasury yield curve spent an extended period inverted (short-term maturity rates were higher than long-term maturity rates). The Treasury curve continues to boast relatively high short-term (< 1 year) rates but is upward-sloping for the most part (long-maturity rates are now higher than short-maturity rates). Moreover, the corporate curve has steepened, so investors are rewarded more for taking on longer maturities. Locking into >5% yields is achievable, thus investors are preserving wealth and building it simultaneously. Corporate bonds provide investors great value in the short to intermediate parts of the curve. Investors willing to concentrate in the intermediate (10- to 20-year) part of the corporate curve may achieve as high as 6% yields.

Mortgage-backed securities offer more sophisticated investors another opportunity to hold a very high credit quality AAA-rated asset with 5% and better returns. Unlike conventional investments, mortgage-backed pools work differently. Much like your home mortgage, where you have the right to pay back the borrowed amount on a scheduled plan or prepay it at an accelerated rate, mortgage pools pay down principal along with scheduled interest, thus speeding up the time when your investment returns the principal invested. Rather than receiving the face value at maturity, the principal is returned throughout the holding period. This may be an attractive choice for investors with IRAs that are tax-deferred.

Despite the volatility of the financial markets and general economic uncertainty, there are many income opportunities with individual bonds. The 2^nd Quarter Fixed Income Quarterly will be released in the upcoming weeks and is dedicated to highlighting the mentioned opportunities in greater detail, along with other ideas. Please talk with your Raymond James financial advisor for the ideas most suited for your situation.

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.