Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
The dilemma that all Fed committees and chairpersons face when the economic cycle nears a turn but then repeats itself can be summed up with Fed chair Jerome Powell’s recent references:
“Easing too soon, too much could harm inflation progress.”
“Easing too little, too late could unduly weaken the economy.”
In this author's opinion, Jerome Powell has kept his message consistent. He has acknowledged that inflation has notably eased but it also remains well above the Fed’s 2% core PCE inflation goal. In Powell’s recent press conference, he indicated that the labor market will become more important moving forward. Last week, the Consumer Price Index (CPI), one of the inflation index indicators, came out lower than anticipated and lower than the prior print for the third consecutive release. The pattern can now be considered a trend and the numbers are finally catching up to the media mantra that alludes to the Fed’s base case in considering rate cuts. Employment has stayed high, contributing to the consumer’s ability to keep consumption ongoing. However, resilient employment and economic strength also allow the Fed to wait for what they believe will be better timing.
We have tried to caution about short-term timing with individual bonds for what is usually a strategic long-term investment product. Last week’s economic releases, including CPI, strengthened Treasuries and pushed interest rates down. The 10-year Treasury yield fell from 4.278% to 4.183% last week. However, the dramatic weekend events concerning the attempted Trump assassination have cut last’s weeks move in half as the pre-market 10-year Treasury yield has rebounded to 4.24%. Although day trading and market timing can bring excitement to investor activity, individual bonds are meant to preserve principal and currently can provide a solid income stream. Individual bonds will always, in any rate environment, support principal preservation. This isn’t always the case with the income stream, thus, current yields warrant special attention while investors can lock into higher levels of income. We suggest locking in for as long as your risk profile allows. The Fed has to walk the tightrope, individual bond investors do not.
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.
Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.
To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.
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