Exploring All Options

Rob Tayloe discusses fixed income market conditions and offers insight for bond investors.

When it comes to making decisions in our daily lives, most of us stick to a certain way of doing things. If we are conditioned to take the same route, we always do to get from point A to point B, that is typically how we proceed. Imagine if there was a new road built that would cut our drive time by 5 minutes. We need to consider this to optimize our results. The same is true for our investments. We need to weigh all the options available and proceed with the investment that allows the highest after-tax return while staying within the risk profile of that situation.

We must realize that spreads are not constant. Each situation must determine how many basis points is it worth to buy an A-rated bond vs. a BBB-rated bond. As you can see in the graph below, the current spread between 7-year A and BBB-rated corporate bonds is at a 12-month low:

 Spread Summary

p>The current spread sits just north of 43 basis points. The high was 69 basis points back on 5/10/23 and the mean over the last year is 57 basis points. The investor needs to determine what that spread is worth. Some may find BBB credits that they feel more comfortable with regardless of yield and other investors may prefer to stick with A-rated names.

It is also important to know the taxation features of individual bonds. For example, Treasuries are exempt from state income taxes, so those accounts housed in states with an income tax will benefit from this feature. The same is true for buying municipal bonds in the state of residence. Investors who are looking for short-term strategies usually decide between CDs and Treasuries. Below, you can see a 1yr CD compared with a 1yr Treasury:

 Client Price, Client YTW