One of the advantages of individual bonds is the ability to custom-select bonds that fit individual needs and/or goals. Every investor is different in terms of age, willingness to take on risk, lifestyle, wealth accumulation, tax bracket, state of residency, and their vision of the future. For these reasons, different investments may be appropriate and may present the most towards achieving future goals. For many investors, bonds are purchased primarily to help preserve wealth; however, for the last ~1.5 years, bonds have delivered a dual benefit: preservation of wealth and high levels of income.
My associate recently dedicated this commentary to the yield benefits of intermediate to long-term municipal bonds. This holds particularly true for investors in the highest tax brackets since the tax-equivalent yields (the yield a taxable bond would need to be to equal the tax-free yield of a municipal bond) easily are north of 6% and often as high as 7%-8%. To put this in perspective, the average annual total return of the S&P 500 Index since the turn of the century is 7.4%. To accomplish close to or exceed growth-like returns in a less risky and more predictable municipal bond should capture investor attention. This isn’t a recommendation to replace growth assets with wealth preservation assets, but I want to highlight the dual benefit opportunity associated with solidifying your fixed income allocation of assets.
Many other opportunities exist. The Treasury yield curve spent an extended period inverted (short-term maturity rates were higher than long-term maturity rates). The Treasury curve continues to boast relatively high short-term (< 1 year) rates but is upward-sloping for the most part (long-maturity rates are now higher than short-maturity rates). Moreover, the corporate curve has steepened, so investors are rewarded more for taking on longer maturities. Locking into >5% yields is achievable, thus investors are preserving wealth and building it simultaneously. Corporate bonds provide investors great value in the short to intermediate parts of the curve. Investors willing to concentrate in the intermediate (10- to 20-year) part of the corporate curve may achieve as high as 6% yields.
Mortgage-backed securities offer more sophisticated investors another opportunity to hold a very high credit quality AAA-rated asset with 5% and better returns. Unlike conventional investments, mortgage-backed pools work differently. Much like your home mortgage, where you have the right to pay back the borrowed amount on a scheduled plan or prepay it at an accelerated rate, mortgage pools pay down principal along with scheduled interest, thus speeding up the time when your investment returns the principal invested. Rather than receiving the face value at maturity, the principal is returned throughout the holding period. This may be an attractive choice for investors with IRAs that are tax-deferred.
Despite the volatility of the financial markets and general economic uncertainty, there are many income opportunities with individual bonds. The 2nd Quarter Fixed Income Quarterly will be released in the upcoming weeks and is dedicated to highlighting the mentioned opportunities in greater detail, along with other ideas. Please talk with your Raymond James financial advisor for the ideas most suited for your situation.
