Bond Market

Keeping it real

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

I’ve talked about the volatile markets and last week highlighted such. The 2- through 30-year Treasuries rallied hard to drop yields from 12 to 18 basis points. By example, the 10-year Treasury price bottomed out at $91.86 (4.93%) and peaked at $95.25 (4.48%). This is a 3.4 point price swing or 45 basis point drop in yield.

The graph below reflects the 10-year Treasury’s yield movement over the last month. Remember that there is an inverse relationship between the price and yield. Last week’s move was a strong price rally which ended in a significant drop in yield. The month has seen much movement and of course, investors sometimes want to time that movement. When they miss purchasing the lowest price, a knee-jerk reaction may suggest that they’ve missed the opportunity altogether. Let’s dispel that myth right now.

First and most importantly, fixed income is not usually considered a growth asset. For many investors, it is not purchased to try to make an investor wealthy. For many investors, it is purchased to try to keep an investor wealthy. This holds true whether interest rates are at 1% or 10%.

Second, many investors buy and hold their fixed income assets to maturity. Therefore, pricing becomes less important in determining the holder’s value. It certainly doesn’t affect the protective design of a strategy meant to keep wealth intact, and it will not play a role in the total return. The secondary benefit is the cash flow stream and income earned. Neither one of these benefits change no matter how volatile the market price becomes. As a buy-and-hold investor, both cash flow and income are locked in from day one through maturity despite any market moves.

Keep it real. Although weekly volatility may seem extreme, viewing the bigger picture reveals that yields remain in a “buy zone.” Rates are still relatively high matching strategies intended on maintaining fixed income as a long-term strategy. The current 10-year Treasury rate hasn’t been this high since 8/29/07 - or in over 16 years - even though it is not at its peak. Maintain long-term planning and be excited that fixed income strategy can be employed in a market with high income levels relative to the last couple of decades.


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.

Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.

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.