Think reality, not possibility
By Doug Drabik, Fixed Income, Raymond James
February 8, 2016
For thirty-four years, four and one-half months interest rates have been on a general interest rate decline. That is one long bull run for the fixed income market. If it is not all of most investorās participating life, it likely represents at least a majority of most personsā investing life. Year-after-year the declaration is made that rates have nowhere to go but up, yet we encounter another interest rate letdown. As a Cubs fan, I can appreciate the wait until next year mentality. As a fixed income investment strategist I caution investors to invest based on reality not possibility.
Total return looks for positive proceeds from both income and capital appreciation and typically is looked at for growing wealth. The fixed income market is not poised for total return in the same manner as say, real estate or equity securities are. Fixed income assets have involuntarily been bucketed with these total return assets because for nearly 34.5 years, they have provided the additional benefit of capital appreciation and in essence spoiled investors who have primarily seen falling interest rates.
Most fixed income investors use these assets to protect wealth; for the predictable cash flow and income. Capital appreciation may be a welcomed side benefit, but for a buy-and-hold investor, capital appreciation (or depreciation) simply shouldnāt matter. The portion of the portfolio which represents the foundation or base capital is protected in fixed income largely because of its key feature: a stated maturity. A point-in-time when the invested capital is returned regardless of interest rate moves over the holding period, barring a default event.
As 2016 starts in disorderly fashion, donāt invest foundation holdings in possibilities. Core investments need to remain or be moved to real income producing fixed assets with stated maturities. There is no safety in āpossibleā rallies or turnarounds and speculative assets should not be substituted for predictable income streams.
Here are some realities facing the start of 2016: Commodity demand continues to wane. Oil supply is robust and old world suppliers continue to scramble to hang onto market share. Technology has changed the power and the pricing of oil for good. Dividends are being slashed. Europe, China and Japan are practicing monetary easing, pumping money into the system in hope of stimulating growth. Equities are not cooperating. Inflation remains faded. Negative interest rates exist in multiple global markets. All of these realities remind us that the relative value of high quality individual fixed income investments continue to provide certainty in uncertain times: Predictable cash flow and return of principal. Advisors assisting investors to creating and maintain well-diversified custom bond portfolios continue to help those same investors achieve goals ā¦ with a measure of peace of mind.
| 12/31/15 | 02/08/16 | ||
|---|---|---|---|
| 1 yr | 0.600% | 0.508% | -9.2 |
| 2 yr | 1.050% | 0.680% | -37.0 |
| 3 yr | 1.308% | 0.848% | -46.0 |
| 5 yr | 1.761% | 1.479% | -28.5 |
| 7 yr | 2.092% | 1.510% | -58.3 |
| 10 yr | 2.270% | 1.775% | -49.7 |
| 30 yr | 3.016% | 2.607% | -40.9 |
Copyright Ā© Raymond James
