The word of the day: Volatility
By Nick Goetze discusses fixed income market conditions and offers insight for bond investors.
Volatility is the word at the top of the list when describing our markets of late. Volatility in headlines. Volatility in emotions. And volatility in securities prices. When reading news or analyzing economic data and the markets get overwhelming, it is best to take a step back, block out as much of the noise as possible and focus on the basics. When you invest in individual bonds the basics are simple. You have a bond that pays you a stated cash flow, your fixed rate yield is locked in at purchase and, barring an unlikely default, you receive one hundred cents on the dollar at the end of the stated investment period. It’s that simple.
However, it is understandable that volatility in pricing on your statement may feel concerning. Yes, if yields go up, prices on fixed rate bonds go down. Just like in the past rates went to historic lows, and prices went to amazing highs. Interestingly, most investors did not sell their bonds at all-time highs. Why, because they could not replace the yield that was fixed when they purchased that bond. They bought the bonds for the known outcome. The same reasoning applies now. The outcome only requires time. Just like when rates were falling, during a rising rate environment the cash flow stream, income earned and return of face value remains constant.
In the bond world, volatility often means opportunities for investors. That is true today and in this market We are seeing yields on investment grade bonds at levels we have not seen in almost a decade. When was that you ask? It was during another period of heavy volatility known as the Taper Tantrum in the summer of 2013. Do not let today’s opportunity pass.
Continuing to add investment grade individual bonds will likely improve the yield on the overall portfolio. If you are of the opinion that we are headed towards a recession, consider buying longer out on the curve to lock in higher rates for longer before the Fed and market potentially reverse course. Owning individual bonds gives you more control of the outcome while other bond options do not.
Your financial advisor can work with you to design a bond strategy custom to your needs and goals. Once invested, the bond portfolio will perform as intended regardless of interest rate moves. Keep it simple, focus on the basics and take advantage of volatility where you can.
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 Securities Industry and Financial Markets Association’s Project Invested website and Investor Guides at www.projectinvested.com/category/investor-guides, FINRA’s Investor section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.