Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
Sometimes it seems as though market products are pitted against each other. The consideration is based on the latest news or potential forecast that improves an investor's at-the-moment potential. The reality is that long-term strategic planning utilizes the characteristics of many market products that work with each other supporting an overall strategy. Long-term considerations apply to growth assets (like stocks) just as temporary advantages likewise may affect fixed income. Each asset plays a role and although the market is presenting growth-like returns in individual bonds, the long-term protective features govern their portfolio purpose.
I’ve been in this business a long time and still can’t help but get caught up in the excitement, risk, potential, and drama of swinging for the fence. If we consume the right information and time things just right and invest in the perfect company and interest rates swing in our favor and availability abounds… we might just hit that perfect investment “home run”. This process makes things more exciting and perhaps we even believe we can outsmart the entire market and outperform everyone else. I’ve played the lotto with the same enthusiasm and hope but realize that while exciting, it is not a reliable long-term strategy for building an investment portfolio.
No matter what the debate, it will not appeal to 100% of investors. There will always be investors adamant about beating the odds or others so conservative that even the slightest risk is too much. The practical account is to examine what works long term for most investors and that likely encapsulates both growth assets and assets designed to protect capital.
Fixed income is not designed to grow wealth. It is designed to keep one’s wealth intact. Therefore it is important regardless of where interest rates are. Individual bonds provide investors with known cash flow, known income and a known point in time when an investor’s face value will be returned. Admittedly, fixed income should be mustering special attention because yields are at levels that are as high as they have been in over 17 years. This allows investors a product that helps to keep capital intact and, as a bonus, produce growth-like income.
There is a lot of noise out there. Remember why you buy fixed income. The reason is likely the same regardless of the interest rate environment. However, enjoy the additional income benefit!
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.
