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Essential Investment Discipline


Read the weekly bond market commentary from Doug Drabik.

April 8, 2019

The bond market continues to respond to day-to-day economic reports, seemingly pushing interest rates up one day and pulling them back down the next. From a global perspective, significant divergence exists between U.S. sovereign rates and other nations’ rates. Over the last couple of years, the anticipation has been the European and Asian markets’ GDPs would recover, a slow down or elimination of quantitative easing would ensue (general global accommodative monetary policy) and global interest disparity would dissipate. The predictions have not held up and in many of the nation-to-nation comparisons, interest rate disparity has actually widened.

I have long reasoned that as the world’s central banks continue to pump money into the markets through quantitative easing, they create a momentous headwind to higher interest rates. There hasn’t been enough positive news in Europe and Asia to push productivity and change their monetary policy. Accordingly, instead of the moderate growth pace of the U.S. pushing general interest rates up, the world economies may be aiding in pulling them down especially now that the Fed has seemingly decided to discontinue their slow short term interest rate hikes.

In a flat or falling interest rate environment, individual bonds play an even more important role, perhaps best summed up as: investing for return of principal, not return on principal. The temptation is to continue to reach for yield or double down in poor substitute products yet prudent investment discipline is essential especially when the yield curve is forewarning of possibly still lower interest rates. Individual bonds afford a protection in this environment that mandates a disciplined allocation.

Maintaining some bond duration affords investors better overall protection and income compensation for portfolios heavily saturated with growth assets as higher duration bonds are negatively correlated with equity volatility. Although the Treasury curve remains flat, the corporate and municipal markets have maintained positive slope. The year-to-date bond market rally has created opportunity to extend duration and possibly “clean up” credits that have deteriorated.

Stay disciplined, stay appropriately allocated with individual bonds and maintain long term strategy. 


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.

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