Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
The finance world can get complicated, especially for the passive or uninterested investor. Let’s face it, some of us are not curious about sports, movies, exercise, reading, or other things while others of us carry a passion for them. Interest levels also differ in the finance world although the lack of attention here could inflict severe consequences to one’s retirement or lifestyle. Financial preparation and strategizing can foster positive differences in our lives and future.
When hearing terminology associated with other industries, it can easily be ignored, or worse, misinterpreted. “Going into the kitchen” in pickleball has nothing to do with the food industry. Cleaning up the deck will likely elicit a different action plan for a ship’s deckhand versus a businessperson preparing for a presentation.
The finance world is laden with complicated phrases and financial terms. For example, two distinct classifications are associated with investing objectives: tactical and strategic. Tactical investing attempts to capitalize on market inefficiencies, look for short-term opportunities, time market entry spots, and/or outdo benchmark performances with a total return focus. Tactical investing is proactive and can involve quick-changing market positioning.
Strategic investing aligns portfolio holdings based on long-term planning with no required day-to-day reallocation due to data releases or market events. Most conservative investors, including those who have a portion of funds dedicated to tactical investing, practice strategic investing on some level. These investors share the goal of long-term planning and safeguarding hard-earned wealth. Focus is often on income and cash flow consequently deemphasizing total return. Safeguarding wealth takes precedence over potential quick-hit opportunities which may bring sizeable returns although also carry substantial risk.
When you hear comments in the media like, “Bonds are down – they are having a terrible year.” The connotation is negative and the statements can create the image of a scary path ahead for individual bondholders. The meaning of the quote reflects that Treasury bond prices have dropped precipitously since the start of the year – but what often goes unsaid is that it also means that yields have risen accordingly. So, although it may be the 3rd worst yearly start for Treasury prices, at the same time it is also the 3rd best yearly start for Treasury rates. Total return or tactical investors will likely view this differently versus strategic, long-term income investors. Total return investors short-term market plays are negatively impacted because prices have dropped. Long-term income investors, who often hold their bonds to maturity, are unaffected because they don’t realize the consequences created by short-term pricing. Bonds held to maturity continue to produce the same cash flow and income as they did from the purchase date and they are not altered by pricing changes as long as the bonds remain in the portfolio.
Furthermore, strategic investors may see the drop in Treasury prices as an opportunity to lock in desirable high levels of income. This window of income opportunity is one we continue to promote as we have not seen yields like the bond market currently boasts in nearly 17 years. It is difficult to differentiate tactical and strategic messaging, particularly given that tactical or total return messaging dominates the industry's communication. Focus on the purpose of investments dedicated or allocated to individual bonds. They are often dedicated to safeguarding wealth which implies long-term strategic planning.
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.
