True Fixed Income: Are You Comparing Apples to Oranges?

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

Timing has never been a crucial undertaking for fixed income allocations dedicated to asset preservation largely because this is a long-term endeavor dedicated to keeping an investor’s wealth intact. For decades, low yields produced modest income while performing as intended – maintaining the wealth generated through riskier growth assets. Although this concept has not changed, the interest rate environment has, thus providing investors the opportunity to not only keep wealth but potentially grow wealth by locking into higher interest rates.

Bond yields and prices have an inverse relationship; as yields move up, the price of a bond will move down (and vice versa). Now that interest rates have increased, this may create a secondary benefit for income-oriented investors. Locking in for longer sustains investors’ wealth, provides a healthy income, and may result in appreciated assets should interest rates reverse direction and begin falling. When constructing the fixed income portion of your portfolio, not all products that hold bonds have the same characteristics or provide the same features. Characteristics can be quite different in comparison. As the old idiom goes, comparing the two can be like comparing “apples to oranges.”


Although many different investments hold bonds, not all are “fixed income” instruments. Take the example of an open-end mutual fund; by design, each share represents an indivisible piece of an actively managed pool of bonds, cash, and other investments. Other structures such as Closed-End Funds and ETFs may hold bonds as well, but most are not truly “fixed income.” For example, with a bond fund, the price of shares and the income generated will rise or fall based on the activities of the manager, the creditworthiness of the issuers, fund flows, and market conditions including changes in interest rates. A further challenge is that many structures have targeted maturities and/or targeted durations. Meeting these targets in a moving interest rate environment may prevent the Net Asset Value (NAV) from remaining stable. These requirements in turn can potentially affect the original principal value invested and can result in a realized gain or loss. In other words, an investor’s originally invested principal is at risk, especially in a rising interest rate environment. Many investors felt the pain of realizing a loss as interest rates rose over the last year.