A Volatile Year With a Silver Lining

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

We’re in the final month of 2023 and what a wild ride it has been. The financial markets, investor opinions, and world events have been all over the place – so bear with me this morning as I am going all over the place with a variety of year-to-date observations and comments.

Interest rates have experienced wide-ranging levels. For example, the 10-year Treasury’s peak daily closing rate of 4.98% (10/19/23) is countered by its lowest close of 3.30% (04/05/23). This 168 basis point (bp) variance translates to over a 5 ¼-point price movement. This large interest rate move accentuates the mixed consumer market views revealed throughout the year. The 10-year Treasury currently sits at 4.25% which is a level higher than it has been in over 16 years. So despite the commotion and currently being off the peak rate, on a relative basis, the bigger picture view tells me it still is a good time to lock into income.

I sometimes hear investors speak of dollar cost averaging their fixed income portfolio. This term is most often associated with stocks largely because they rely heavily on price appreciation to generate income. Since many investors utilize fixed income to protect wealth and often hold their bonds to maturity, price movement becomes inconsequential versus locking into desirable cash flow and income levels. The benefit of protecting wealth exists in any interest rate environment but the additional income offered today hasn’t been seen in over 16 years.

Additionally, I’ve heard the expression “hedging our position” with a maturity mix or staying short to be conservative. Staying short is not conservative, it is an interest-rate call. By staying short, reinvestment risk rises. In other words, as maturities occur, the money is put back into the market in at-the-moment rates. It is a daring investment-timing move to purchase short-maturity bonds if it is believed that interest rates have a higher probability of moving down.