Market Mayhem, Questions Roused... Answers

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

The Monday Bond Market Commentary is a teaser for the upcoming Q4 Fixed Income Quarterly. The fixed income team has dedicated much time to exposing answers and alternatives for investors during this tumultuous time. Its release is targeted for early next week.

This is the year of uncertainty. The year that volatility has regained its foothold in the markets. That means questions ensue from market participants on all levels. To address these questions, we are dedicating the fourth quarter Fixed Income Quarterly issue to addressing some of the more common fixed income queries, qualms and market prognostications accompanying this market madness.

Extreme markets can incite excessive responses from investors. Don’t fall into that trap. Regardless of market conditions, we advocate certain portfolio standards for conservative investors, not the least of which is preserving appropriate asset allocation. Thinking long term, as opposed to reacting to the moment, can promote the increased likelihood of achieving financial goals. Although stocks have taken their knocks this year, such growth assets are an integral component for capital appreciation. Conversely, fixed income assets are designed to help preserve that capital once it has been created. This is true whether interest rates are at 1% or 10%.

Although many investors employ fixed income assets primarily to preserve capital, today’s bond market is alluring investors with its high yields as a welcome secondary benefit. Consider that the S&P 500 Index has achieved an average annual total return of 6.20% since the turn of the century (2000-present). Taxable options such as corporate bonds and tax-exempt municipal bond tax equivalent yields can capture close to that return if not eclipse that return in high credit quality choices. Locking into growth-like returns with high quality bonds suggests that it is a great time to shore up your portfolio’s fixed income allocation.

Product choice and product features such as coupon selection and maturity are important considerations. Funds with bonds are a very different product than individual bonds. Individual bonds have a stated maturity protecting principal in a way that can’t be duplicated with products that do not have a stated maturity. Higher coupons create greater cash flows and typically exhibit lower price volatility. Longer stated maturities allow investors to lock into returns reducing future reinvestment risk. Talk with your financial advisor about individual bond features that promote success toward your investment goals and look for the upcoming Fixed Income Quarterly for answers to common questions aroused by the current Market Mayhem.