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Bond Market Commentary

An investor’s best friend… the dependable individual bond

By Doug Drabik
September 25, 2017

Be careful with your assumptions. We’ve shown how poor the industry pundits can be at predicting the future. Using mislaid information to validate investment choices can lead to real disaster. Headline recklessness is often rooted with unsubstantiated theories on what is going to happen should certain events transpire.

The Federal Reserve Bank (Fed) started a series of quantitative easing programs after the 2007-2008 financial crisis. By 2009, the Fed brought short-term rates to a lower/upper band of 0.00%-0.25% where they stayed until December 15, 2015. Since then we have had four Fed rate hikes, each of 25 basis points. So after hiking the rate 100 basis points, where have interest rates ended up? Only the shortest of rates have shown any sign of sustained higher levels and even at that, far less than the contrived 100bp in hikes. Note that the intermediate part of the curve has basically stayed flat, and the longer-end is actually down in yield, realities that may alter the thought process of “out-guessing” long-term investment strategy.

The Fed is now talking about another rate hike in December, 2017 and three more in 2018. Let’s learn from recent history. Fed hikes do not necessarily translate across the curve, nor do they even dictate that interest rates in general will be going up. So many other factors are obviously influencing our current overall interest rate environment.

Another recent headline suggests that the Fed’s decision to begin unwinding the balance sheet will have a huge impact on interest rates. Again, be careful. Review last week’s commentary. The economy is global whether we want to admit this or not. As long as the global central banks continue to create money, it is likely that the Fed’s unwinding would be inconsequential as it is dwarfed by the overall monetization of assets.

The Federal Reserve’s balance sheet was between $840 and $870 billion prior to the beginning of the financial crisis in 2007. According to Bloomberg data, it now is $4.47 trillion. Four of the major central banks have combined balance sheets now larger than the gross domestic product of the United States. The size and the impact cannot be ignored.

They may be deemed as the consistent and predictable component of your investment portfolio: dependable individual bonds. When held-to-maturity (and barring default) they will provide cash flow, income and a set date when face value is returned, regardless of interest rate movement during the holding period. Articles are written all the time insinuating that when interest rates go up (which as discussed has been a speculative assumption), you will lose money with your bonds. This is simply not necessarily true if a bond is held-to-maturity. A monthly statement may reflect an unrealized loss on a bond but that market price has no bearing on the cash flow received, income earned or the face value returned at maturity. No other asset class can claim this and this is why individual bonds offer a protection not available with other asset classes. It is also why individual bonds afford a great balance to the growth assets (such as equities) that hold more market risk.

Lastly, take a big step back. News outlets tend to dramatize. Years from now we may look back at this time period and observe: a period of time where inflation was in check, unemployment was low enough for employment to be considered full, and the GDP of the US continued to grow; all of this while most other economically significant nations struggled with all of these but inflation.

Keep things in perspective and don’t get caught up in turning long-term investment planning into short-term conjecturing. Dependable individual bonds will always play an important role in appropriate investment portfolio balance. Suitable asset allocation and utilization of bonds remains an important investor discipline.


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.