Megan P. from Dover,
DE asks: Good Evening Mitch, my question today is about investing in bonds.
I read in a previous column of yours that you expect long-term interest rates
to rise later this year and beyond. What does that mean for bond investors?
Mitch’s Response:
Thanks for emailing your question, Megan, and thanks for
reading. I do indeed believe we will see some upward pressure on the long end
of the yield curve later this year and in ensuing years, as inflationary
pressures pick up on the heels of massive growth of the M2 money supply. There
are a few implications for bond investors if that happens, in my view.
As long as the US economy continues recovering and perhaps
increases the pace of recovery in the second half – which I believe it will – inflation
pressures are likely to follow suit. Much of the extraordinary monetary and
fiscal stimulus has made its way into the real economy, via transfer payments,
business loans, and outright grants. All of this liquidity sloshing around the
economy is likely to give way to inflationary pressures, in my view. That’s
where you get upward pressure on longer term interest rates. Rising interest
rates means falling bond prices, which could adversely affect performance and
total return for bond investors.
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But that does not mean investors should steer clear of
bonds. While rising rates could certainly impact bond prices in the short-term,
they could also help boost longer term returns, assuming that a fixed income
manager continues to invest the proceeds of maturing bonds into new bonds with
higher yields. This would not only potentially boost returns over time, but
also provide progressively higher levels of income for the portfolio. We
actively manage our bond portfolios here at Zacks Investment Management.
In the current environment, however, I’d recommend bonds if
your main desire is to reduce volatility in your portfolio and protect against
the potential for steep losses. In a sense, that kind of advice doesn’t change
over time – in stocks’ worst times, bonds tend to hold up better, which
neutralizes the effect on your portfolio. In 2008, for instance, when the
S&P 500 tanked -37%, the Bloomberg Barclays U.S. Aggregate Bond Index
gained +5.2%.2 Over time, stocks have been effective for investors
getting the long-term growth they need to finance retirement goals, and bonds
often help to smooth out the ride.
One final note to consider, however, is that investing in
bonds is not well-suited for short-term objectives or market timing. So, my
very high-level response to your question is that you should invest in bonds
only if your investment objectives and
risk tolerance call for it. If you are looking to reduce volatility in your
portfolio over time, and you have a goal of generating modest income over long
stretches, then there is probably a place for bonds in your investment
portfolio. If you want or need none of those things, then we’d have to take a
closer look at whether bonds make sense for you at all.
When managing the highs and lows of the market, finding the
right investment strategy can make a huge difference. To help you learn more
about strategies that cater to different investment objectives, we have created
our Dean’s List of Investment Strategies.3
Our Dean’s List describes five of our investment strategies
that are ranked in the top of their respective classes, according to
Morningstar (as of 12/31/20).4 If you have $500,000 or more to
invest and want to learn more about these strategies, click on the link below
to see how they could potentially benefit you.
Disclosure
1 ZIM may amend or rescind the “Dean’s List of Investment Strategies” guide for any reason and at ZIM’s discretion.
2 Guides to the Markets. JP Morgan. December 31, 2020.
3 ZIM may amend or rescind the “Dean’s List of Investment Strategies” guide for any reason and at ZIM’s discretion.
4 These rankings may not be representative of any one client’s experience. In addition, they are not indicative of future performance.
DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.
Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.
This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.
Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.
Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable.
Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.
Returns for each strategy and the corresponding Morningstar Universe reflect the annualized returns for the periods indicated. The Morningstar Universes used for comparative analysis are constructed by Morningstar (median performance) and data is provided to Zacks by Zephyr Style Advisor. The percentile ranking for each Zacks Strategy is based on the gross comparison for Zacks Strategies vs. the indicated universe rounded up to the nearest whole percentile. Other managers included in universe by Morningstar may exhibit style drift when compared to Zacks Investment Management portfolio. Neither Zacks Investment Management nor Zacks Investment Research has any affiliation with Morningstar. Neither Zacks Investment Management nor Zacks Investment Research had any influence of the process Morningstar used to determine this ranking.
The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees or other expenses. An investor cannot invest directly in this Index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
The Barclays Capital U.S. Aggregate Bond Index represents the price and yield performance, before fees and expenses, of the total United States investment grade bond market. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.