Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
The Devil is in the details. We’ve all heard this expression before. Something might seem very simple at first but when we take a little more time and put a little more effort into the task, there are important realities in the details.
We talk a lot about the importance of portfolio allocation and maintaining the appropriate balance of growth (often total return) assets with core or wealth preservation assets. At first glance, the investment world seems to be heeding this important balance allocation. Let’s take a look (chart on right) at the consistent shift or inflow of money into long-term fixed income mutual funds and ETFs since the beginning of the year. With the exception of one week, the flow of money has been positive into municipal and taxable funds and ETFs accumulating to nearly $350 billion this year alone.
There are some interesting elements associated with this investor behavior. First, not everyone or every dollar is being allocated to the equity market. Another way to view this is that there is some movement to less risky assets or assets dedicated to creating a balance in the overall portfolio even though interest rates are near historic lows. Regardless of interest rate levels, the importance of principal preservation has not been lost.
The “detail” that begs coverage or at the very least, the question that should be asked remains, “is this allocation providing the principal protection intended”? The answer may very well be “yes” and the allocation may be appropriate. However, we should acknowledge a primary difference between individual bonds and packaged products that have bonds in them. That is a stated maturity.
Why is a stated maturity so relevant? A stated maturity provides an investor an option absent in most all other investment products… the ability to hold a bond to that maturity date thus negating all market price movements which occur over the holding period. Holding individual bonds arms you with the knowledge of how much money will be returned to you at the end of your holding period… packaged products do not. Individual bonds can protect investor principal in a way that is non-existent in most investment products and it is done without paying ongoing fund or management fees. The devil is clearly in these details. Is your fixed income allocation providing your desired principal protection?
To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.
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.
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