By Kristin Hovencamp, CPWA®
Do you remember the story of the ugly duckling who became a swan? Fixed income has become that swan. Until March 2022, interest rates remained nearly zero, and bonds paid almost nothing. Bond allocation had dropped dramatically. Now that interest rates are over 5%, investors rush to lock in bond yield before it is too late. Bond purchasers, whose main goals are safety and generating income, often become alarmed if they see the bond’s value turn negative. What can cause bond prices to change?
Interest rates. Interest rate movement causes the underlying price of a bond to adjust frequently. As interest rates rise, bond prices fall. This occurs because newly issued bonds often have a more attractive yield than outstanding bonds. Likewise, if interest rates decline, outstanding bond prices increase.
Market environment. Historically, investors pile into stocks when equity market returns are positive and appear to be on an upward trend. Bond purchases expand when the stock market is underperforming, and investors become skittish and seek safety.
Credit rating. All bonds are assigned a credit rating when they are issued. The most common credit rating agencies are Standard and Poor’s and Moody’s. The creditworthiness of a bond defines the bond issuer’s ability to pay interest and principal at maturity; for example, the price of a bond will likely decrease if its credit rating is downgraded and categorized as a riskier investment.
Date of maturity. The price of a bond is reflected in the age of the bond. Regardless of whether the bond trades at a premium or a discount, the shorter the time to maturity, the closer it moves to its face value (the bond price when issued).
Why is everyone talking about buying bonds and other debt instruments? Because bond yields are higher than we have seen in years. Remember, you do not need to worry about price fluctuation if you plan to buy and hold the bond to maturity.
Kristin Hovencamp, CPWA® is an Investment Executive and Director of Business Development with HAZLETT WEALTH MANAGEMENT, LLC, which is independent of Raymond James and is not a registered broker/dealer. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. 675 Sun Valley Road, Suite J1 + J2 Ketchum, Idaho 83340 208.726.0605.