The appeal of a portfolio of individual bonds for many investors are the known qualities that they can provide: a known stream of cash flow, a known redemption value, a known redemption date, and a known yield; all of which are locked in at the time of purchase.* Oftentimes, the fixed income sleeve of a portfolio will have a target yield that is aligned with a long-term financial plan. The current fixed income landscape is providing elevated yield relative to most points in time over the past several decades. From a portfolio construction perspective, this means that achieving those target yields that set an investor up for long-term success are achievable in higher quality investments, which hasn’t always been the case over the past 15+ years.
The chart below highlights how the current interest rate environment is providing an opportunity for investors who have a yield target for their fixed income investments. The chart shows 10-year maturity yields across a range of credit qualities at three different points in time: today, five years ago, and ten years ago. Many yield targets that were unavailable just a few years ago can be easily achieved today. For an investor with a 6% yield target five years ago, that goal was unachievable even with ‘B’ rated corporates, which are well into high-yield territory. Today, an investor can get a 6% yield with investment-grade rated corporate bonds. Ten years ago, investors were purchasing ‘B’ rated corporates at similar yields that investors today are purchasing ‘BBB’ rated corporates. For an investor with a 5% yield target, ten years ago they would have had to purchase ‘BB’ rated bonds, five years ago they would have had to purchase ‘B’ rated bonds, today they can get a 5% yield with a US Treasury.
As yields are at some of their most attractive levels of the past two decades, investors can not only hit their yield targets, but can do so in high-quality, investment-grade bonds. An investor five or ten years ago might have had to stretch into credit quality that might have been outside of their desired risk parameters in order to finds yields that aligned with their long-term goals. The opportunity available today is higher yields in higher quality bonds.
*Barring a default or other extraordinary circumstances.
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.
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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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