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Contemplating Your Fixed Income Move?


March 14, 2022

Risk: noun exposure to danger, harm or loss.

Further scrutiny could lead us to assess economic risk, investment risk, market risk, etc. At the end of the day the higher the “risk”, the greater the probability or likelihood of occurrence of loss (or gain) relative to expected return on an investment. Real, or at the very least perceived risk looks as if it is elevated on many fronts.

Risks associated with global central banks’ potential maneuvers appear elevated. Will they hike interest rates? One hike of 50bp or 25bp? Two, three, four or more hikes? Will they sell off some of the balance sheet?

Commodity prices appear to be in a state of elevated risk. We have all experienced the wide swings in oil prices and are paying lofty per gallon prices at the pump. Will wheat potentially quadruple in price as some suggest? What about the shortage of fertilizer? Will this reduce crop yields and consequently create a food shortage? Will the Russia/Ukraine war limit the mining of certain compounds or minerals used in the production of products we use and take for granted daily?

The supply chain issue has been lingering for some time now. Will it last weeks, months or even years longer? Will the long-term solutions move us away from globalization and towards local/domestic production? At what cost and for how long?

It is not difficult to find divergent answers to how all this will play out and to plausibly explain the rationale getting you to the conclusion of your choice. This is because the factors (like those above) are many, the probabilities are numerous and therefore the outcome has many many possibilities. It is why the markets are uncertain and volatile. It is why so many explanations sound credible. The bottom line is that no one can possibly know 2022’s outcome because these variables can play out so many ways.

This uncertainty plays well with the one product that provides some of the greatest certainty for investors. Individual bonds, barring default, provide investors with upfront and holding period knowledge not necessarily available in other securities. An individual bond provides known cash flow, known income and a known date when the face value will be returned. This happens regardless of what the central banks do, how commodity prices change or when the supply chain is fixed.

The added incentive investors can capitalize on is that year-to-date, interest rates are higher and spreads are wider resulting in higher available yields for income investors. Right now represents one of the better times investors have seen in a long time to get the most out of market conditions and improve on the capital preservation assets (individual bonds) within the investment portfolio. If rising interest rates, inflation or any of the menacing market conditions have you anxious, now is an opportune moment to reevaluate your portfolio allocations and analyze how they are insulated from these market uncertainties.


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