Bonds Are Acting Like Bonds Again

Chris Keith

Senior Vice President, Fixed Income Manager

It’s amazing what a turnaround in performance can do for the value of your holdings…and for your peace of mind. That’s right, bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. started behaving more like, well, bonds again in May and investors breathed a sigh of relief.

Clearly there’s been a change in market sentiment, which is something I touched upon in March when I answered the question: Are Your Bonds Broken? It’s probably too early for a victory lap, but a burgeoning sense of vindication seems about right.

We urged bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. investors to take advantage of the sell-off over the past few months, even though bond yieldsYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. were climbing and prices were dropping. After all, you can’t time the market, but you can dollar-cost average into it. That is exactly what we’ve been up to.

Doing so was neither a leap of faith nor wishful thinking. Rather, our confidence in the bond market stems from a disciplined commitment because we are comfortable with how the product works and know that patience can be rewarded. We also know history and how interest rates tend to revert to lower levels when the strength of the U.S. economy is called into question. And attaining the Federal Reserve’s goal of lower inflation means growth likely must slow.

This isn’t to say that additional drawdowns in bond prices are impossible, but when rates hit a new cycle high, it’s a good time to add to existing bond positions.

No matter what’s transpired this year, bonds can still be an investor’s friend by balancing riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. and providing income to portfolios. When other asset classes experience sharp declines, that’s when we turn to high-quality bonds. And by the way, those high-quality bonds are producing more income today than they were just a few months ago.