Read the weekly bond market commentary from Doug Drabik.
January 7, 2019
As market volatility increases, investors’ hearts beat with more anxiety and nervous palpitations. The markets are changing so as an investor, portfolio repositioning is a must. Well… not so fast. Not all portfolio product type allocations serve equal purposes. In many respects, the fixed income allocation may not require as much change as the portfolio’s growth sectors. During more volatile markets, disciplined and long-term thinking are challenged and often needlessly abandon course. Long-term fixed income planning should not be altered by short-term volatility.
One of the most important and sometimes forgotten components of fixed income investing is that it is a long-term discipline that requires long-term planning. Don’t get roped into treating fixed income in the same manner regularly required of equities or other growth assets that rely heavily upon price appreciation to achieve performance goals. Fixed income can be the hedge against equity instability and provide stable income regardless of volatility. Another point not to be ignored is that regardless of price volatility, fixed income assets held to maturity continue to provide the same uninterrupted cash flow and income during those volatile periods.
Although the market focus typically pivots around the Treasury yield curve, spread products have behaved differently. By example, the corporate yields across the curve have moved sideways or with far less drop than compared to Treasury yields. What this means is that investors can still get close to the same yields in certain product types (corporates, municipals, preferred securities, CDs, etc…) as they could prior to the recent dramatic Treasury curve move. Note the heavy black line denoting the spread between corporate and Treasury bond yields. Corporate yields (red line) have remained comparatively strong and thus the spreads have widened, providing investors with solid options to satisfy fixed income allocations.
As investors allocate to various asset classes, we must keep one eye on the market and the other eye must keep disciplined sight on the finished line.
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.