Why Fixed Income Has Double Appeal

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

As a strategist, I work with financial advisors every day creating custom fixed income portfolios based on client’s financial needs and goals – with a keen eye on the importance of a balanced portfolio. Two major roles exist in reviewing those goals and needs: growth assets (equities, MLPs, real estate, businesses, etc.) to expand wealth and conservative/protective assets (fixed income) to keep your wealth intact. This still holds true. This is the constant when everything else may not be constant such as changing interest rates, cash flow projections, demand shifts, economic conditions, etc.

 2 Year Treasury

Right now is no different except you get to capture a potential dual benefit. Fixed income continues to serve its purpose protecting your wealth and balancing your growth assets. In addition, individual bonds are providing an income opportunity. Yields are higher than they have been in over 16 years. Investors have the opportunity to lock into “growth-like” yields. For instance, the average annual total return of the S&P Index since the turn of the century (23+ years) is 6.66%.

In addition, should the Fed change direction with monetary policy, and/or the economy slip into a recession, it is likely that interest rates will fall. When interest rates fall, prices go up, thus potentially providing positive price appreciation on fixed income assets added to the portfolio during this high interest rate environment.