In Case You Haven’t Noticed

Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

In general, portfolios can be split into growth assets and principal protecting assets. Growth assets tend to have greater risk coupled with greater income/reward. These assets potentially “grow” your wealth. Principal protecting assets tend to provide less growth with less risks and are meant to keep your wealth intact.

The S&P 500 Index, a gauge for the equity market which is a primary indicator for most growth allocations, has an annualized total return of 6.87% since the turn of the century (23.68 years – 2000 through August 2023).

An investor in the highest federal tax bracket (37%) can buy a 23-year tax-exempt bond with a tax-equivalent yield ranging from 6.4% to greater than 8.0% depending on one’s state of residency and the bond’s state of issuance. An investor can nearly match, or in some cases exceed tax-equivalent yields associated with long-term, growth asset holding periods with more conservative wealth-sustaining assets.

Interest rates have recently reached levels not seen in 15 years. Locking into current yields with individual bonds can sustain your wealth and possibly grow it too, a great secondary benefit. We don’t typically endorse timing the market since judicious investment portfolio management dictates balanced asset allocation regardless of interest rate environments, but current market conditions seem highly favorable to shore up fixed income positions.

Practice proper diversification of asset classes (stock and bonds) and maintain diversified holdings within each class. Timing markets is typically reserved for total return tactical operations but take heed at what the yield curves are offering for fixed income investors. This fixed income window of opportunity may stay open only as long as the Fed maintains its tightening policy.