Read the weekly bond market commentary from Doug Drabik.
July 2, 2018
There are things we hear and have accepted as absolute even though they actually may not be. For instance, have you ever struggled to see something and stated that you’re blind as a bat? Have you ever thrown salt in the water to make it boil faster? How about sip a drink at a frigid tailgate to warm up? Have you avoided individual bonds because you’ve been told rates are going up and your bonds will lose value?
There are roughly 1,100 bat species, none of which are blind. Salt water actually has a higher boiling point. Alcohol does not prevent you from losing core body heat. Lastly, changing interest rates actually have no effect on the bonds held value, only the market value. As a matter of fact, as long as you hold a bond, the cash flow it generates and the income you earn remain intact all the way to maturity. A bond would have to default or an investor would need to sell it prior to maturity to alter any of these actualities.
We likely are influenced or programmed to think based on what we hear. Where investments are concerned, it might be argued we are influenced to think that all investments act and/or react the same way: Buy low, sell high. Timing the purchase is critical. Daily monitoring is essential.
Where individual bonds are concerned, stop thinking like a stock investor. When purchasing bonds to buy and hold and protect principal, think like a bond buyer. Barring default, when the purchase of a bond is complete, there is no second guessing or changing benefit. The coupon payments will be made throughout the entire holding period and the bond’s face value will be paid in full at maturity. It is not altered due to rising or falling interest rates, appreciation or depreciation of its price, geopolitical turbulence, positive or negative commentaries, market volatilities, program buying biases or any other event with the exceptions of default or a sale prior to maturity.
Bonds have a place in nearly all investors’ portfolios. A bond may lack the excitement and growth potential provided by other investment alternatives, but the dependability, safety and consistency deliver a means to protect one’s wealth. Think like a bond buyer.
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.