Fixed Income Q3 2020

Pushed lower by monetary policy and direct market intervention (such as asset purchases) by central banks. The result has been that bond holders, who purchase these instruments expecting a steady stream of coupon income, have been forced to accept lower levels of income. Another reason investors purchase bonds is to receive their principal back at a specified time. Unlike stocks, bonds mature and return principal on a maturity date (some bonds have flexible maturity schedules based on “call” provisions that allow the issuer to choose when to redeem the bonds). Unless the borrower defaults – typically a last resort – investors will receive their money back at maturity plus interest earned over the holding period.

In this way, bonds offer not only income but safety of principal. For this reason, bond investments often make sense as a way to invest for shorter-term horizons or to earn some incremental yield above cash
and money market instruments. Because of the relative safety of bonds, having a dedicated allocation to fixed income investments can provide a cushion in the portfolio against overall market risk. High quality bond prices tend to remain stable in times of uncertainty, especially when interest rates are not expected to rise and inflation is low.

As low as bond yields are in the United States, they remain relatively attractive versus the roughly $14 trillion in foreign bonds that trade with negative yields, a dynamic that we do not expect to see in the U.S.

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As the Fed pushes up interest rates and other central banks around the world follow, yields on fixed income continue to climb. This is welcome news for savers, as returns on cash and short maturity bonds are up significantly this year.
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Global equity market performance continued to deteriorate in the third quarter. U.S. equities, as measured by the S&P 500 Index, returned -4.9% in the quarter, including dividends.
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