Posts tagged: bonds
“It seems that everywhere you turn, the press is asking, “When is the Fed going to raise interest rates?” While that may be the question du jour, for long-term investors, the question is irrelevant to the construction of a high-quality bond portfolio.
1. Understand the role bonds play in a portfolio. When it comes to managing a bond portfolio, many investors, especially retirees, are mainly focused on generating income, but investors need to be aware of the risks taken to achieve a set amount of income in today’s low interest rate environment. For example, when interest rates are low (and bond prices are high), the income approach would cause an investor to buy more bonds, extend duration or accept lower credit quality in order to maintain a certain level of income. Likewise, if you think back to the early 1980s, when you could lock in long-term bond rates over 10%, the income approach would cause investors to own fewer bonds — even though the lower prices (higher yields) were a once-in-a-generation buying opportunity.
A better approach is to divorce the cash flow decision from the income decision. To do this, an investor needs to set a rational asset allocation, periodically rebalance to that target, and allow the total return of the entire portfolio to satisfy any income needs as opposed to viewing the interest generated by a bond portfolio as the sole source of income. Once a monthly (or some other frequency) withdrawal rate that meets an investor’s living expenses is determined, some combination of interest, dividends and proceeds from maturities and sales will provide enough cash to meet the withdrawal each month. Read more »
Investors are waking up to the significance of sovereign credit risk in global debt markets, but quantifying the appropriate premium remains difficult. In response, BlackRock introduced a transparent and disciplined approach to assessing credit risk for sovereign debt issuers. The BlackRock Sovereign Risk Index numerically ranks issuing countries using a comprehensive list of relevant fiscal, financial and institutional metrics.The results contain several interesting insights for debt investors, and some very distinct groupings of countries emerge. The top countries are fiscally responsible and institutionally robust Northern European states, and the bottom ones include the European periphery as well as some emerging markets.
Drawing on a pool of more than 30 quantitative measures spanning financial data, surveys and political insights, the BlackRock Sovereign Risk Index (BSRI) provides investors with a framework for tracking sovereign credit risk in 50 countries.
The BSRI breaks down the data into four main categories that each count toward a country’s final BSRI score and ranking: Fiscal Space (40%), Willingness to Pay (30%), External Finance Position (20%) and Financial Sector Health (10%).
To use the tool go to:
https://www.blackrockblog.com/blackrock-sovereign-risk-indicator/# Read more »
“The chart below shows the difference between estimated Global bond demand and supply. This mismatch aids in returns for fixed income, as more investors look to invest (creating more demand) with less supply to satisfy these needs. The left chart breaks down the sources of demand, showing that monetary easing has created a large portion of this demand as developed market central banks continue to purchase bonds to stimulate their economies.
The next slide highlights the growth in the fixed income markets and provides some data points to highlight some of the diversification benefits of different markets. Read more »
- Falling Treasury yields have helped push the total return on the Barclays U.S. Corporate Bond Index to 6.6% so far this year, above most other types of fixed-income investments.
- Although yields on investment-grade bonds have fallen, their spreads compared to Treasuries are near the historical median, making them fairly valued, in our view.
- Despite the relatively low yields, we still think investment-grade corporate bonds offer an attractive yield relative to Treasuries.
After a disappointing 2013, investment-grade corporate bonds are once again delivering positive returns, thanks mainly to price gains linked to falling Treasury yields. And although yields on investment-grade corporate bonds are now near all-time lows, we still think they look attractive relative to Treasuries and make sense for investors looking to generate income without incurring too much risk.
Positive total returns
The Barclays U.S. Corporate Bond Index has generated a total return of 6.6% this year—a nice improvement from its 1.5% drop in 2013. In fact, investment-grade corporate bonds have performed better than most other types of fixed income investments this year, including sub-investment-grade bonds, as you can see in the chart below.
Investment-grade corporate bonds have posted strong year-to-date total returns
Stocks have outperformed every other asset in the long-run. In shorter, specific periods however this can vary. Meanwhile, cash is in fact not king as it struggles to keep pace with inflation.
“All year the consensus regarding bonds has been that they are in a late stage bubble that is about to pop as long-term interest rates will rise and the price of bonds will sharply plummet. The consensus has been wrong. We saw a sharp spike in rates after Fed Chair Ben Bernanke first mentioned tapering QE3 in June, but the long rate has since come back down and currently stands at 2.51%. It seems the demise of the bond market has been a little premature.
Did the Fed Bail Out the Bond Market?
So what happened to the bond bubble that was supposed to pop? A few things have prevented a catastrophe for investors heavily allocated to bonds. The market had been anticipating the start of tapering of QE3, the Fed’s bond-buying program in which they have been purchasing U.S. Treasuries and mortgage-backed securities. Bernanke first mentioned tapering in mid-June and the 10-year rate jumped from approximately 2.20% to 3.0% in a very short time frame. This was a huge move for bonds, however, the market got ahead of itself as the tapering that seemed like a sure thing never materialized. The Fed kept QE3 unchanged due to what it felt was weaker-than-expected economic data. Since the non-tapering decision, the 10-year Treasury rate has come back down to approximately 2.50%. Read more »