Fixed Income Q2 2020

The yield on the 10-year U.S. Treasury Note ended the quarter at 0.65% and after adjusting for expected inflation, yields are negative in “real” terms for high quality government bonds. This means that the purchasing power of the income generated from government bonds will likely fail to keep pace with the increase in the price of goods and services over time. While bonds offer safety in the form of low volatility and return of principal, return on capital will be scarce at best and the expected total return for this asset class will remain quite low. While a low return may be hard to accept, there are several reasons why we continue to own bonds in client portfolios.

First, high quality bonds offer a significantly higher interest rate and income when compared to cash. We have focused our fixed income investments in high quality corporate bonds. On average, these bonds yield between 1-2%, versus 0.1% on a typical money market vehicle. While cash is useful to meet near term capital and distribution requirements, we are migrating away from cash in favor of short and intermediate term bonds as well as bond funds where the investment horizon allows.

Second, bonds offer a diversification benefit in the form of low correlation versus equities. While stock prices fluctuate over time, high quality bond prices remain generally stable. Their stability helps cushion the impact of price changes on a broad portfolio over time.

Third, because of their relatively low volatility, bonds can be a source of capital to draw upon without having to sell stocks at an inopportune time. Using the proceeds from sold or matured bonds may
result in lower capital gains taxes and provide greater flexibility to meet distribution needs without sacrificing longer-term growth.

Finally, high quality bond yields are very safe. Corporate balance sheets remain generally healthy, and we are highly attentive to the financial flexibility and cash-generating abilities of the companies we invest in for our clients (including both bonds and stocks). So, while bond returns are likely to remain low, bonds offer capital preservation and return of principal, and enable us to better manage a broad portfolio for the short and long term.

More Insights

Economic & Market Commentary

Fixed Income Q4 2022

The past year has been difficult for fixed income investors, with the sharp rise in bond yields leading to a fall in bond prices. After an extended period of low interest rates, bond prices corrected sharply throughout the year as the Fed raised rates and increased its forward projections for those rates.
Read more

Economic & Market Commentary

Equities Q4 2022

U.S. and global stock markets experienced solid gains in the fourth quarter but remained significantly in the red to end 2022. The S&P 500 Index gained 7.5% in the quarter including dividends, recouping some lost ground but ending the year down 18%. U.S. stock market performance was bad in 2022 no matter how you cut it. However, it is interesting to note that the Dow Jones Industrial Average, which is a stock price-weighted index of only 30 large companies, returned a solid 16% in the fourth quarter and declined only 6.9% in 2022, faring much better than the S&P 500.
Read more

Up Next

Insights