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

The markets have been impulsive for some time now, responding to the news of the day. Last week was no exception with the collapse of Silvergate Bank and Silicon Valley Bank. The implications were felt across the markets as the S&P fell 4.7% on the week and the ten year Treasury yield dropped 25 basis points (bp). The Board of Governors of the Federal Reserve System has released a statement on how insured and uninsured depositors will be protected. The motive is to prevent a bank run and the potential catastrophe associated with one.

Yields dropped significantly as investors moved toward safe haven assets such as Treasury bonds. Leading up to this event, the Fed had actually been cueing the market for a potential 50bp Fed Funds hike (versus the 25bp hike presumed by the market). Now a Fed pause is being weighed by investors as monetary and fiscal policy actions mingle. Investor response will be telling. Will small banks suffer run consequences? Will stocks take a bigger hit? Will the Fed pause in their fight on inflation?

The incessant questions, continuing uncertainty and market shocks should be a reminder of why important basic portfolio practices exist. Two of these significant practices are maintaining suitable asset allocations and appropriate diversification. Interest rates have been on a rollercoaster pattern as have stock prices. For most investors, it is the long game (long-term strategy) that matters. There will be ups and there will be downs in stocks and bonds. But in the long run, bonds will tend to provide more stable actions and stocks more growth. Maintaining appropriate allocations to each, regardless of market conditions, tends to keep long term goals on target. Deviating from these allocations for the sake of short term advances can deter from long-term results when these actions don’t pan out.

Recent market events also remind us of the importance of diversification. Although risks vary, all securities carry them and no absolutes exist. Stock prices have been down but bond prices have accelerated. These trade offs occur in both directions over time and thus the importance of maintaining appropriate allocations. But gains or losses can also occur due to developing situations or unfortunate shockers (pandemics or mismanaged business). Diversification among invested obligors mitigates this risk. Last week is an unfortunate but luminous reminder of the importance of portfolio basics: maintain appropriate asset allocations and proper obligor diversification.

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.