Individual bonds: Predictability in an unpredictable market

Nick Goetze discusses fixed income market conditions and offers insight for bond investors.

Individual investment grade bonds have two main purposes for investors. First, they provide a higher degree of safety of principal as most have a defined timeline when an investor can expect a return of invested capital. Second, the vast majority of bonds have a defined yield at the point of purchase. In these cases, the investor’s return is known assuming it is held until a regular call or maturity. This predictable outcome can offer peace of mind for what is generally the more conservative part of a portfolio. However, price movement on existing holdings can often lead to angst.

The benefit of owning a customized portfolio of individual bonds is that regardless of interest rate changes in the market, which cause prices and bond values to fluctuate, the portfolio will perform as intended. Capital invested will be returned on stated timelines, and yield will be earned through coupon cash flow and/or growth to par in the case of a discounted purchase price. Price changes along the way do not alter this outcome, barring the very unlikely event of a default. The media and most industry strategists do not delineate the differences

between how bonds are owned and for what purpose they are held. They focus on total return metrics, taking into account the price movement of bonds. If an investor owns an actively managed portfolio, where they do not have control over when bonds are bought and sold, what distribution amounts will pay out, or what areas of the bond market they are invested in, price movement is very important to total return as they are dependent on valuations for principal return.

Bond prices will likely increase as yields decline and decrease as yields rise. The known outcome when held to stated calls or the maturity date make much of that movement background noise. While the majority of investors focus on current market value as highlighted by the media and industry pundits, custom investment grade bond portfolios will perform as intended.

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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.