If it isn't broken, don't fix it!
Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
Products and services often benefit from great marketing. A catchy commercial, headline, or gimmick can attract potential customers. Sometimes marketing can be so effective that customers seek or support an average or even inferior product. None of us are immune to the charms of a good story. Catchy new ways attempt to tell the same market story, not because it isn’t an extraordinary opportunity, but because it’s a creative way to garner new attention.
I’m going to lay it down without the fluff or glitz. Straight from the strategist:
- Interest rates have been elevated for the last three years. When interest rates are elevated, investors may capture greater levels of income.
- For many investors, investment-grade individual bonds are a means to help preserve a portfolio’s capital. Relative to other assets like growth assets, there is less risk with less volatility. Individual bonds create a ballast for the equity allocation of a portfolio.
- Takeaway: With rates elevated, fixed income is providing the dual benefit of helping preserve capital and earn higher income.
- Credit is generally strong; therefore, this opportunity exists without needing to compromise credit standards. Investors can capture this opportunity in high-quality, investment-grade municipal and corporate bonds.
- Interest rate cycles are typically long. Prior to the current elevated interest rate period, interest rates were extremely low for nearly two decades. Investors may only get one or two opportunities throughout their investment span to capture higher interest rates in fixed income. When granted this opportunity, it may be beneficial to lock into rates for longer or increase the duration of fixed income allocations.
- Product yield curves exhibit steepening upward slope, meaning investors are rewarded for taking on risks associated with extending.
There may be countless ways to view this story, but the opportunity speaks for itself. Investment-grade individual bonds can provide investors with high levels of income that can be locked into for as long as an investor is willing and able to extend. It certainly isn’t broke, so no need to find different ways in an attempt to fix it.
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.
