Bond Market Commentary

Market Volatility Initiating Opinions

Doug Drabik
January 24, 2023

We fear that we will not have enough so we react with greed at any opportunity that will potentially provide that stuff we need. Case in point: we hear that tissue supply will be depleted so we stock six months’ worth. The result: we just contributed to the shortage and prevented others from even accessing the bare necessity. The reality: over a short period of time, the supply issue was resolved through capital market initiative. Case in point: inflation will rage so we look to Treasury Inflation Protected Securities (TIPS), Series I Savings Bonds, or other inflation-indexed securities to protect our wealth from losing buying power. The result: TIPS demand places the sector into negative yields creating much higher long-term breakeven levels for inflation. The reality: Investors sacrifice present benefits for future potential based on an unknown inflation pace. Sometimes the cost of future protection (prediction) comes at too great a cost to current benefits.

Human behavior can respond decisively to trends, hype, greed, fear, etc. As I pointed out last week, it is very easy to justify current beliefs, regardless of their extremity, with expert opinions in a very wide spectrum because that range of opinion exists on the current state of the economy. I am not trying to convince you that your opinion, whatever it is, should be altered by the media, my opinion or any expert’s wisdom. The objective is to assure you with the idea that many fixed income investors do not need to predict the future, respond to every market twist or rely on some at-the-moment substitute to accomplish long term strategies. Buy and hold investor's primary goals are oftentimes preservation of principal and by holding a bond to maturity, many volatile market and economic factors are mitigated as your fixed income holding (barring default) performs the same from day one until its maturity.

The Federal Open Market Committee (FOMC) meets for the first time this year this week. The market began 2022 with a significant rise in interest rates. The market is forward-looking and currently has the following expectations built-in: a first rate hike in March, three to four rate hikes for the year and a reduction in the balance sheet likely to start around mid-summer. A surprise would most likely occur if the Fed’s message fell outside of these current expectations. Remember that expectations don’t always become reality and that the Fed hiking short term interest rates does not mean that the rest of the yield curve will move in sync. At the end of the day, even with this year’s opening yield surge, interest rates remain historically low.

If you believe interest rates are headed higher, we have published several commentaries on fixed income options that will likely perform well in a rising rate environment and those that may not. In addition, we will be publishing the Q1 2022 Fixed Income Quarterly a few weeks earlier (normally printed mid-quarter) to coincide easier with 2022 fixed income planning. If you believe interest rates will stay in a low tight range, much of 2022’s planning will be to stay the course established last year. No matter what your opinion, do not let the at-the-moment hype derail your long term fixed income planning. We will continue to deliver specific strategy plans over the upcoming weeks. Provide your financial advisor with your opinions but more importantly, hold on to your long term investment goals and we will work together as a team to deliver very personal fixed income strategies for 2022.