Drew O'Neil discusses fixed income market conditions and offers insight for bond investors.
The volatility experienced across the bond market over the past several months is a good reminder of two important truths: 1) things can change quickly, and 2) there is no guarantee of a return to yesterday. Discounting or ignoring these somewhat basic statements could potentially affect portfolio returns long into the future in a negative way. Let’s dig a little deeper.
Things Can Change Quickly…
Yields are at some of their highest levels in well over a decade across the fixed income landscape. The ability to lock in yields at these attractive levels for years to come is an extraordinary opportunity for fixed income investors. Yet, the amount of time that this window will be open is unknown and could disappear quickly and potentially not return for another decade or more. The past several months are a reminder that yield opportunities can disappear quickly. “Strike while the iron is hot” is a cliché that comes to mind.
The chart below shows the yield of the Bloomberg US Corporate Bond Index over the past few months and highlights how quickly things can change. The green arrow highlights a ~35 basis point decrease in yield over the span of just a few days, from 10/31 to 11/3. Stretching out the window from mid-October to now (11/22) and we see a ~65 basis point decrease in yield in just over a month. So hypothetically, a corporate bond portfolio that yielded 6.43% a month ago is yielding 5.78% today. That is a fairly sharp decrease in yield opportunity over a relatively short period of time.