By Bill Smith, Fixed Income Trader and Portfolio Manager
Fixed Income Volatility Remains High
Yields continue to rise in October as a strong labor market, inflation above the Fed’s 2% target and increased Treasury supply reinforce the “higher for longer” rate narrative. High yield continues its outperformance, while most Treasury, investment grade corporate and municipal indexes are negative on the year. The “YTD Total Return” chart below provides a year to date (YTD) return summary for select ICE BofA bond indexes.
Source: ICE BofA Indexes, Bloomberg. Past performance is no guarantee of future results.
With a potential rate hike in 2023 still looming, and expectations for future easing falling deeper into 2024, volatility may remain high for the foreseeable future. While this environment may pressure bond prices in the near term, it also offers income investors a unique opportunity. Higher yields offer greater income potential, and the fixed maturity, fixed coupon structure of individual bonds helps mitigate the long-term impact of price moves.
Embrace Higher Yields – Income Returns are Always Positive
While prices fluctuate over the life of a bond, one aspect of fixed income investing is constant: Income returns are always positive. Barring a default or bond call, you know how much you’re going to make, and you know when you’re going to get paid. The chart below, “Annual Total Return Composition,” helps to illustrate this point. Regardless of the direction of bond prices in any given year, coupon payments are always a positive contributor to total returns.
Source: ICE BofA Indexes, Bloomberg. Past performance is no guarantee of future results.
Breathe Easy – Bonds Mature at Par
One of the most important aspects of fixed income investing is also the simplest. Bonds mature at par (face value). For buy-and-hold investors, unrealized gains and losses due to shifting interest rates can largely be ignored. Barring a default or bond call, no matter the price volatility experienced over the life of a bond, investors principal is returned at maturity.
Fixed Income Yield Summary
With yields near multi-decade highs, bonds across asset classes and maturities continue to look attractive. The chart below, “Yield to Worst,” summarizes the current yield of select ICE BofA indexes, broken out by maturity band.
Source: ICE BofA Indexes, Bloomberg. Past performance is no guarantee of future results.
A prudent approach to fixed income investing calls for diversification across both credit and duration exposure. As always, Dynamic recommends staying balanced, diversified and invested. Despite short-term market pullbacks, it’s more important than ever to focus on the long-term, improving the chances for investors to reach their goals.
Should you need help navigating fixed income for your clients, please contact Dynamic’s Investment Management team at (877) 257-3840, ext. 4 or investmentmanagement@dynamicadvisorsolutions.com.
Bill Smith serves as president, Portfolio Management & Trading, of Harmont Fixed Income in Phoenix.
Disclosures
This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.
This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance, or avoid loss.
All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way.
Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed.
Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.
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