Market volatility initiating opinions
Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
We fear that we will not have enough so we react with greed at any opportunity that will potentially provide that stuff we need. Case in point: we hear that tissue supply will be depleted so we stock six months’ worth. The result: we just contributed to the shortage and prevented others from even accessing the bare necessity. The reality: over a short period of time, the supply issue was resolved through capital market initiative. Case in point: inflation will rage so we look to Treasury Inflation Protected Securities (TIPS), Series I Savings Bonds, or other inflation-indexed securities to protect our wealth from losing buying power. The result: TIPS demand places the sector into negative yields creating much higher long-term breakeven levels for inflation. The reality: Investors sacrifice present benefits for future potential based on an unknown inflation pace. Sometimes the cost of future protection (prediction) comes at too great a cost to current benefits.
Human behavior can respond decisively to trends, hype, greed, fear, etc. As I pointed out last week, it is very easy to justify current beliefs, regardless of their extremity, with expert opinions in a very wide spectrum because that range of opinion exists on the current state of the economy. I am not trying to convince you that your opinion, whatever it is, should be altered by the media, my opinion or any expert’s wisdom. The objective is to assure you with the idea that many fixed income investors do not need to predict the future, respond to every market twist or rely on some at-the-moment substitute to accomplish long term strategies. Buy and hold investor’s primary goals are oftentimes preservation of principal and by holding a bond to maturity, many volatile market and economic factors are mitigated as your fixed income holding (barring default) performs the same from day one until its maturity.
The Federal Open Market Committee (FOMC) meets for the first time this year this week. The market began 2022 with a significant rise in interest rates. The market is forward-looking and currently has the following expectations built-in: a first rate hike in March, three to four rate hikes for the year and a reduction in the balance sheet likely to start around mid-summer. A surprise would most likely occur if the Fed’s message fell outside of these current expectations. Remember that expectations don’t always become reality and that the Fed hiking short term interest rates does not mean that the rest of the yield curve will move in sync. At the end of the day, even with this year’s opening yield surge, interest rates remain historically low.
If you believe interest rates are headed higher, we have published several commentaries on fixed income options that will likely perform well in a rising rate environment and those that may not. In addition, we will be publishing the Q1 2022 Fixed Income Quarterly a few weeks earlier (normally printed mid-quarter) to coincide easier with 2022 fixed income planning. If you believe interest rates will stay in a low tight range, much of 2022’s planning will be to stay the course established last year. No matter what your opinion, do not let the at-the-moment hype derail your long term fixed income planning. We will continue to deliver specific strategy plans over the upcoming weeks. Provide your financial advisor with your opinions but more importantly, hold on to your long term investment goals and we will work together as a team to deliver very personal fixed income strategies for 2022.
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.