Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
In March, things really heated up. The coronavirus became real, there was a substantial pick up in volatility and spreads (the difference between an investment and a risk-free Treasury) widened. Uncertainty intensified.
Then came the Fed and their willingness to throw their entire arsenal of power at preventing the markets from turning upside down or inside out. We can talk about earnings and ratios and economic releases but their impact is muted or even negated by the Fed’s ability to control proceedings. The Fed has something that no business, no municipality or no individual possesses. It is their ability to create limitless amounts of cash at the ease of a keystroke. As a matter of evidence, absorb the dramatic $3 trillion upsurge in the size of their balance sheet (depicted on the next page) from February ($4.1 trillion to the present $7.1 trillion).
Despite lingering investor uncertainty, there are certain takeaways for investors to deliberate:
- The Fed has stated their intent to leave short term rates low through 2022.
- The Fed has acted and shown no reserve in providing whatever stimulus it takes to keep the markets vigorous.
The message is uncomplicated: Don’t abandon long term fixed income strategy:
- Maintain appropriate allocation.
- Laddered maturities can contribute to mitigating interest rate risk, reinvestment risk and avoid “guessing” the future.
- Duration management can support long term strategy. The Fed has “given” us a heads up on short term rates. Market rates hovering near historic lows supports avoiding unnecessary extension. This suggests exploring maturity ranges (or in-the-call ranges) of 3 to 10 years.
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.
Stocks are appropriate for investors who have a more aggressive investment objective, since they fluctuate in value and involve risks including the possible loss of capital. Dividends will fluctuate and are not guaranteed. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
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