Read the weekly bond market commentary from Doug Drabik.
From October through December 2018, spreads on high yield corporate bonds elevated rapidly. Booming cries of a credit crisis captured headlines and investors’ attention. Spreads peaked on January 3rd. As spreads hurriedly dropped, prices took off, causing excitement for the potential total return play. The emotional rollercoaster investors face when substantial market moves are amplified by media narratives are becoming commonplace. For many, the discipline of resisting yield-reach and staying the course may be the right antidote.
First, take a step back, ignore the media allure and assess the market particulars. If you isolate October 2018 through January 2019 you get one picture: spreads were sprinting north at the same time equities were pulling back. However, even at the January peak, corporate spreads were not far off of their 5 year averages. In October 2018, spreads had fallen to near 4 year lows, so a bounce should have been expected or at least not be surprising. Now as we observe the spread levels, they seem to be settling into the 2017 to September 2018 range. In addition, further price appreciation that benefitted total return numbers since January is minimized at best and corporate yields have declined along with the Treasury yields. There appears very little additional reward and/or potential given the additional credit risk in the high-yield market.
For many disciplined investors, the yield-reach promoted by some is correctly ignored and instead portfolio balance is executed. For these investors, bonds provide the stability in a portfolio, not the excessive volatility. Taking risk is left to asset classes such as equities or real estate. Don’t stretch for yield at the expense of credit quality. Don’t get caught up in the negativity pinned to bonds as prices fall. The effect on bonds in your portfolio is negated when they are held to maturity. Remember, barring default, bonds provide predictable cash flow, steady income and the return of face value regardless of how interest rates (or prices) fluctuate during the holding period.
Now is not the time to deviate your fixed income portfolio from long term investment planning: steady and balanced.
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.