Keeping It Real

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

I’ve talked about the volatile markets and last week highlighted such. The 2- through 30-year Treasuries rallied hard to drop yields from 12 to 18 basis points. By example, the 10-year Treasury price bottomed out at $91.86 (4.93%) and peaked at $95.25 (4.48%). This is a 3.4 point price swing or 45 basis point drop in yield.

The graph below reflects the 10-year Treasury’s yield movement over the last month. Remember that there is an inverse relationship between the price and yield. Last week’s move was a strong price rally which ended in a significant drop in yield. The month has seen much movement and of course, investors sometimes want to time that movement. When they miss purchasing the lowest price, a knee-jerk reaction may suggest that they’ve missed the opportunity altogether. Let’s dispel that myth right now.

 Last Trade Yield

First and most importantly, fixed income is not usually considered a growth asset. For many investors, it is not purchased to try to make an investor wealthy. For many investors, it is purchased to try to keep an investor wealthy. This holds true whether interest rates are at 1% or 10%.

Second, many investors buy and hold their fixed income assets to maturity. Therefore, pricing becomes less important in determining the holder’s value. It certainly doesn’t affect the protective design of a strategy meant to keep wealth intact, and it will not play a role in the total return. The secondary benefit is the cash flow stream and income earned. Neither one of these benefits change no matter how volatile the market price becomes. As a buy-and-hold investor, both cash flow and income are locked in from day one through maturity despite any market moves.

 H15T10Y Index