Good News? Bad News?

Drew O’neil discusses fixed income market conditions and offers insight for bond investors.

Are higher yields good news or bad news for fixed income investors? It might depend on your perspective. From the perspective of a total return investor trying to time the market and capitalize on potential price appreciation, yields moving higher and prices moving lower is probably not what you want to see. From the perspective of an investor in a “fixed income” packaged product with no maturity date, where price movement tends to be a major component of realized returns, higher yields are likely bad news. From the perspective of an investor in individual bonds who is allocating to fixed income in order to preserve capital and provide a steady stream of income, higher yields are good news.

Year to date, most bond prices have fallen fairly dramatically, meaning investors with money to put to work are being presented with an opportunity to buy high-quality fixed income products at levels that we have not seen in years. Lower bond prices give investors the opportunity to lock in higher yields; they are not something to be scared of and now is not a bad time to be a fixed income investor. The seemingly daily negative commentaries about the recent trends in the fixed income market are almost always written from the perspective of total return investors or money managers who are trying to time the market and outperform the market on a quarterly basis. Investors who are investing in fixed income with the goal of capital preservation and/or consistent income and cash flow are likely best served by buying and holding individual bonds to maturity, meaning that price movement is irrelevant. For these investors, the charts below highlight the opportunity in individual bonds. These represent a range of hypothetical portfolios based on index yield levels and provide good insight into just how much more attractive fixed income has become since the start of the year, with a focus on the short to intermediate part of the curve.

The left portion of the chart shows the portfolio statistics used for the illustrations. The right four columns show the average portfolio yields at the end of 2021 versus April 1. The dramatic jump higher in yields is easy to see. A one to five year municipal ladder has nearly quadrupled in yield. A one to five year corporate ladder moved higher by 167 basis points, a 121% increase in just three months. The 3% yield bogey, a target that has eluded many investors in recent history, is now achievable with an investment-grade corporate bond portfolio. Portfolio yields on a taxable equivalent basis in the municipal bond arena are approaching 4% for portfolios 15 years and shorter (and currently achievable with longer dated portfolio).

The takeaway for most investors is that now might be a great opportunity to invest in fixed income. Many investors have been sitting on the sidelines for months (or years) waiting for higher yields. As the chart above shows, higher yields are here. Ask your financial advisor for a customized fixed income portfolio to see how the recent move higher in yields is the opportunity you have been waiting for.

To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.

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.

Stocks are appropriate for investors who have a more aggressive investment objective, since they fluctuate in value and involve risks including the possible loss of capital. Dividends will fluctuate and are not guaranteed. Prior to making an investment decision, please consult with your financial advisor about your individual situation.