Drew O’Neil discusses fixed income market conditions and offers insight for bond investors.
Volatility in the bond market has increased over the past month to reach its highest level over the past year. The chart below shows the MOVE Index, which is an index that measures the US bond market volatility. It currently sits at its highest level over the past 12 months and ~23% higher than its average over that timeframe. Various factors are likely contributing to the recent volatility, from geopolitical uncertainty to economic data releases to anticipation about the US elections. Reverberations will likely be felt over the coming months regardless of the outcome of the election. Volatility is likely here to stay until we get some level of clarity on the political landscape.
Volatility can sometimes provoke anxiety within investors, given the swings it can cause in the value of their portfolio combined with hesitation over trying to perfectly time the market with new investments. Given the current environment, it is a good time to remind ourselves of the primary objective that fixed income seeks to fill in a portfolio, which is to preserve wealth and provide consistent income and cash flow. Ignoring short-term market volatility and resisting the urge to try to time the market by actively trading long-term fixed income investments will likely yield better results over long periods of time. This brings us to an important distinction: trading versus investing.
Trading takes a short-term point of view, attempting to maximize total return based on short-term market moves and opportunities. This tends to lead to a fairly active approach, where sharp market moves in the market could trigger some sort of reaction.
Investing generally comes with a longer-term time horizon. Instead of looking to capture short-term gains or limit short-term losses like a trader might, an investor is likely to stick with a long-term plan based on their personal goals. For example, their goals may include ensuring they have enough money to support their current lifestyle, retiring in 10 years, or to making sure their grandchildren’s college funds will be fully funded 15 years from now.
A trader positions based on what just happened or what they predict is about to happen in the immediate future. Positions are generally entered and exited over a relatively short timeframe.
An investor will reposition or reallocate based on changing market fundamentals and/or a change in personal goals, life events, or risk tolerance. These investments and allocations are generally held for a long period of time and tend to shift slowly according to a disciplined plan.
A trader might think they can “beat the market.” If they outperform their benchmarks, they consider themselves a winner.
An investor does not care about beating the market, an investor cares about achieving their personal long-term goals. Whether they outperform or underperform an arbitrary benchmark does not affect their personal outcome.
A trader might buy an individual bond priced at 105 because they believe that due to some short-term market dynamics, the price will increase to 108 over the next month and they will be able to sell at a profit.
An investor will purchase a bond at 105 that is yielding 5%, knowing that it will mature at par (100) 10 years from now, because earning 5% annually over the next 10 years will help them achieve their long-term goals.
Does investing or trading align with your investor profile? Your Raymond James financial advisor can help to ensure you stay on track to achieve your long-term financial goals in the face of market volatility.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.
To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.
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