Individual investment grade bonds have two main purposes for investors. First, they provide a higher degree of safety of principal as most have a defined timeline when an investor can expect a return of invested capital. Second, the vast majority of bonds have a defined yield at the point of purchase. In these cases, the investor’s return is known assuming it is held until a regular call or maturity. This predictable outcome can offer peace of mind for what is generally the more conservative part of a portfolio. However, price movement on existing holdings can often lead to angst.
The benefit of owning a customized portfolio of individual bonds is that regardless of interest rate changes in the market, which cause prices and bond values to fluctuate, the portfolio will perform as intended. Capital invested will be returned on stated timelines, and yield will be earned through coupon cash flow and/or growth to par in the case of a discounted purchase price. Price changes along the way do not alter this outcome, barring the very unlikely event of a default. The media and most industry strategists do not delineate the differences between how bonds are owned and for what purpose they are held. They focus on total return metrics, taking into account the price movement of bonds. If an investor owns an actively managed portfolio, where they do not have control over when bonds are bought and sold, what distribution amounts will pay out, or what areas of the bond market they are invested in, price movement is very important to total return as they are dependent on valuations for principal return.
Bond prices will likely increase as yields decline and decrease as yields rise. The known outcome when held to stated calls or the maturity date make much of that movement background noise. While the majority of investors focus on current market value as highlighted by the media and industry pundits, custom investment grade bond portfolios will perform as intended.
