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Fixed Income... Why Now?

By Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

OK… so this is a trick question because appropriate allocation of asset classes should exist during any market, in any interest rate environment and at any time. This is because various asset classes strive to accomplish distinctive goals for the overall portfolio. Simply stated, growth assets typically have greater risks with bigger upsides (to “grow” wealth), while capital preservation assets are more predictable with less upside or downside outcomes (to “protect” wealth).

Timing markets is usually left to the growth assets. The appreciation of a stock is an important component of return. For example, when you buy a stock at $64 a share, the anticipation is that down the road, you can sell it at $70, $80 or some price level higher than your purchase price. When you buy an individual bond, barring a default, you are locked in through the life of the bond’s existence… which, unlike perpetual equity securities, is a finite period of time. When held to maturity, this lends interim price movements irrelevant to the individual bond’s return. Although an individual bond’s primary purpose is principal protection, its secondary purpose of providing cash flow and income is unaffected by changing market prices when held to maturity. An individual bond “locks in” cash flow, income and a finite date when its face value is returned.

So all this said, why now? Again, appropriate asset allocation “always” exists, however, the petition for “now” addresses those investors who have waited or redirected assets due to low interest rates or hopeful substitutes. It also addresses discretionary asset class weightings which I suggest should be allocated heftier towards fixed income than during average times.

The S&P Index since the turn of the century (January 2000 through September 16, 2022) has produced an annual total return of 6.36%. This past week I created a taxable portfolio of individual bonds returning a yield-to-maturity of 5.00% with a duration of 3.65. Barring a default, this investor committed to a modest duration with an easy-to-sleep-at-night locked-in yield. Committing to a slightly longer duration could net an even higher yield to maturity. Another portfolio I constructed had a yield-to-maturity of 5.23% with a duration of 4.84.

Tax-exempt investors will also find stimulating results. One portfolio had a yield-to-worst (YTW) and yield-to-maturity (YTM) of 3.48% and 3.56% respectively. That is a tax equivalent of 5.56% and 5.68% with a duration of 6.89 for investors in the highest tax bracket. Locking in longer has even greater allure. Another portfolio had a YTW/YTM of 4.038%/4.05% with a duration of 10.4. This is a tax equivalent yield of 6.596%/6.615% for investors in the highest tax bracket. For a personalized proposal based on your goals and financial situation, contact your financial advisor.

Don’t ditch your growth assets. Over time, they should continue to provide growth. However, note that “now” is an opportune time to shore up your fixed income allocation with strong yields. Your sleep can benefit from knowing you can lock into historically healthy cash flows and income with a choice of length of time in individual bonds.


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.