Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
The Monday Bond Market Commentary is a teaser for the upcoming Q4 Fixed Income Quarterly. The fixed income team has dedicated much time to exposing answers and alternatives for investors during this tumultuous time. Its release is targeted for early next week.
This is the year of uncertainty. The year that volatility has regained its foothold in the markets. That means questions ensue from market participants on all levels. To address these questions, we are dedicating the fourth quarter Fixed Income Quarterly issue to addressing some of the more common fixed income queries, qualms and market prognostications accompanying this market madness.
Extreme markets can incite excessive responses from investors. Don’t fall into that trap. Regardless of market conditions, we advocate certain portfolio standards for conservative investors, not the least of which is preserving appropriate asset allocation. Thinking long term, as opposed to reacting to the moment, can promote the increased likelihood of achieving financial goals. Although stocks have taken their knocks this year, such growth assets are an integral component for capital appreciation. Conversely, fixed income assets are designed to help preserve that capital once it has been created. This is true whether interest rates are at 1% or 10%.
Although many investors employ fixed income assets primarily to preserve capital, today’s bond market is alluring investors with its high yields as a welcome secondary benefit. Consider that the S&P 500 Index has achieved an average annual total return of 6.20% since the turn of the century (2000-present). Taxable options such as corporate bonds and tax-exempt municipal bond tax equivalent yields can capture close to that return if not eclipse that return in high credit quality choices. Locking into growth-like returns with high quality bonds suggests that it is a great time to shore up your portfolio’s fixed income allocation.
Product choice and product features such as coupon selection and maturity are important considerations. Funds with bonds are a very different product than individual bonds. Individual bonds have a stated maturity protecting principal in a way that can’t be duplicated with products that do not have a stated maturity. Higher coupons create greater cash flows and typically exhibit lower price volatility. Longer stated maturities allow investors to lock into returns reducing future reinvestment risk. Talk with your financial advisor about individual bond features that promote success toward your investment goals and look for the upcoming Fixed Income Quarterly for answers to common questions aroused by the current Market Mayhem.
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.