Friends,
Fixed income has been a hot topic of discussion this year with regards to investment strategy given the current economic and geopolitical environment. Typically, investors maintain an allocation to fixed income securities (including treasuries, bonds, CDs, etc.) in order to generate income and as a means for diversification to reduce overall portfolio risk and volatility. While we would all like for bonds to act as a buffer when equities sell off, bonds have declined in value this year along with the stock market selloff. In fact, the U.S. bond market was down 10% year to date through the end of April. This should not cause people to abandon their fixed income strategy.
Why Invest in Fixed Income?
- Provides a predictable income stream in the form of coupon payments
- Invests in a different asset class that helps reduce the portfolio risk of more volatile stock holdings
- Capital preservation and downside protection
Why Have Bonds Dropped This Year?
- Bond prices typically decrease when rates rise, which we’ve seen this year
- High inflation typically causes reduction in bond prices as investors fear the yield won’t keep pace with inflation and demand falls
Why Keep Bonds In Your Portfolio Now?
- Bonds typically provide a buffer as stock markets correct
- In February and March 2020, the S&P 500 index fell by nearly 33% in just 23 trading days. As stocks sank, the Bloomberg U.S. Aggregate Bond Index trended higher, ultimately finishing the year up by more than 7%.
- Bonds have often provided positive returns even as rates were rising. During two of the most-recent hiking cycles – 2004-2006 and 2015-2018 — both U.S Treasuries and municipal bonds saw strong gains on a total return basis.
- As rates are rising, there can be an opportunity to buy new bonds with higher interest income. Shifting to shorter-term bond maturities may reduce further interest rate risk and still provide income over the short-term.
For our investors who own bonds/bond funds, please reach out to us regarding our fixed income strategy.
Matt and Andrew