Conservative investing misnomer

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

For a very long period in time, nearly 41 years, Treasury rates have been on a general decline. That is until 2022 came around. So for a very long time, I have heard investors talk about wanting to stay “conservative” or short in maturity length because assuredly, interest rates were about to go up. Despite the persistent conviction to rising rates, year after year, in opposition, they continued to decline.

Hindsight decreed that the most successful action would have been to add duration. Locking in long term higher interest rates would have provided the better returns versus multiple short maturity purchases over a period of time.

The mantra going into any of these periods was the same. “I’m staying conservative – short in maturity.” My contention is backed by history. Staying short is not necessarily conservative. Staying short, going long or even doing nothing are in essence, decisions based on perceived future interest rate direction. If anyone really knew where future interest rates were going, a simple math calculation would tell us exactly how far out on the curve to invest. However, since we do not know what the future holds, all decisions present risk. The decision to do nothing and the decision to stay short are conjectures that interest rates will rise. The risk is that interest rates decline. The decision to invest long term implies an outlook for falling interest rates. The risk is that interest rates rise.

Today we are dealing with immense uncertainty. Pundits can’t agree on whether we are in a recession, whether the Fed will be able to curb inflation or whether dozens of other pertinent data and geopolitical events will wind up playing havoc on the markets. It is not a proper moment in time to be taking on unnecessary risks with fixed income investments and strategies. With the Treasury curve flat with infinite possible market turns, staying short does not necessarily equate to being conservative. Likewise, extending long constitutes its own risks.

Considering all the volatility and uncertainty, laddering bond maturities may represent the most conservative path for mitigating interest rate risk while the economic cycle completes its path. Again, this is not a time to reach or stretch duration risk or credit risk but equally don’t misconstrue that doing nothing or staying short is conservative. Bond ladder strategies can be shortened or elongated based on personal biases and therefore conservatively play into the volatile markets stirred by all the current uncertainty.

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 Securities Industry and Financial Markets Association’s Project Invested website and Investor Guides at www.projectinvested.com/category/investor-guides, FINRA’s Investor section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.