Read the weekly bond market commentary from Drew O’Neil.
July 16, 2018
The chart below should look familiar, as it was used in a commentary a few weeks ago to highlight a number of points related to the Fed Funds rate, the slope of the yield curve, and past recessions (ask your advisor for a copy if you missed it). I’d like to use it to make another point on the beauty of individual bonds and the role that they can play in a long-term investment strategy.
One of the great things about owning an individual bond is that once you buy a bond, the yield is locked in, regardless of what happens between the day you purchase it and the day it matures. For example, if you buy a bond today that matures in 20 years with a yield and coupon of 4% (purchased at par), regardless of what happens with the yield curve, the economy, the Fed Funds rate, etc. for the next 20 years, you are still going to receive your 4% coupon payment every year and receive your principal back at maturity 20 years from now (of course, barring default).
This chart covers a 30+ year timeframe from 1986 through the last recession in 2008-2009. Over this period, we saw four different Fed Funds rate increase cycles, four yield curve inversions, and three recessions, while the 10-year Treasury yield peaked at over 10% fell all the way down to just above 2%. Simply put: a lot happened over this 30+ year window.
The beautiful thing about individual bonds is that if you bought a 30-year Treasury at the start of all this and held it to maturity, none of this affected you at all. The 30-year Treasury issued in January of 1986 had a coupon of 9.375%. If an investor would have purchased this bond in 1986, they would have received the 9.375% coupon payments every year for 30 years and par back at maturity in 2006. Everything depicted in the chart above was just noise and did not effect this bond at all. This highlights the role that individual bonds generally play in a portfolio: stability and defined cash flow.
For investors hesitant to put their fixed income dollars to work because they are unsure or uneasy about what is going to happen to the yield curve and the economy next month, next year, or the next 10 years, keep the example above in mind and remember the “knowns” that come along with individual bonds, regardless of the “unknowns” that lie ahead elsewhere.
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.