Don’t Rely on the Seer of Seers

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

It may be fitting that Groundhog Day occurs on a Monday this year. Punxsutawney Phil has been officially prognosticating the weather since 1887. I’m guessing he must be the oldest groundhog to ever walk the planet. How nice it would be to have a “Washington Wally” to be the Seer of Seers for financial prognostication. Fortunately for us, fixed income portfolio allocations are more about strategic planning than prediction. We are in a healthy financial environment that lends itself to fixed-income opportunities, many of which have been covered in the Bond Market Commentary and other Raymond James white papers. Let’s review the important highlights.

• The stock markets are amid a historic run. Six of the last seven years have boasted double-digit returns, including the last three consecutive years. There is an opportunity to lock in some of those gains. It may also be prudent to rebalance your portfolio's asset-class allocations to maintain a well-composed strategic allocation into wealth preservation assets. This is not about exiting equities. It is about harvesting gains, reinvesting them in fixed income, and improving certainty.
• Rebalancing helps to preserve what you have already earned. High-quality, investment-grade fixed income locks in that growth while still preserving future growth potential through maintained growth balances.
• The bond market yields available today allow these wealth-preserving assets to produce dependable income. This dual benefit exists because of the elevated rate environment.
• Rebalancing is a risk-management moment, not a market call. There is no need to tap into Punxsutawney Phil or Washington Wally and rely on uncertain projections.
• It is easy to get caught up in tactical trading, which often makes short calls on market direction to capture proceeds, while the stock market is basically moving straight up. This isn’t about relying on this tactical trade but rather injecting fixed income as a strategic stabilizer. This is less about predicting what comes next and more about locking in the benefits already made.
• The yield curves have been steepening, which means that longer maturities are providing greater potential income benefits for investors willing to extend out.
• Bonds are typically not purchased with the hope that they go up in value (a different mindset from buying stocks). Bonds are held in portfolios so that your capital performs as it is supposed to, providing consistent cash flow, income, and return of principal.

We are in that moment. Waiting to capture increasing future benefits risks the ability to lock in gains in hand. Let’s leave the prognosticating to our weather seers.

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.