by Brian Erickson, Vice President of Fixed Income Research and Strategy, Ameriprise Financial
- A changing interest rate environment highlights the importance of reassessing your fixed income portfolio
- Attractive opportunities exist in today’s market, particularly in shorter-term securities
- Partner with your advisor to develop fixed income strategies based on your goals
Beginning with the Great Recession and financial crisis of 2008, fixed income investors have become accustomed to an environment of historically low interest rates. The status quo in the bond market has lingered for a surprisingly extended period. But the environment has changed notably over the past year, prompting investors to consider new strategies for their fixed income portfolios.
High quality, short-term bond yields keep up with inflation
Investors seeking yield may no longer need to add undue or uncompensated risk through lower-quality or longer-dated investments. Instead, it’s time to consider returning to investing in high quality, short-term securities, where inflation-matching yields have returned.
At the end of September, high quality, short-term bonds offered a 3% yield1, surpassing the year-over-year rise in the Consumer Price Index (CPI), which is considered the inflation benchmark.
Prepare for more volatility in the bond market
Now may be the time to re-evaluate the types of investments you select for liquid or short-term allocations. Options include money market funds, certificates, CDs and ultra-short term bonds (which have maturities of about one year). Differences among these investments may have seemed insignificant in the past. In today’s changing environment, however, you should carefully weigh your options based on factors like yield, credit quality and liquidity when matching investments to your financial objectives.
We believe bond markets are likely to experience more volatility ahead. Be aware of that risk as you consider investing available assets.
The impact of a flattening yield curve
In the current environment, you have an interesting opportunity to reduce the interest rate sensitivity of your portfolio. The Treasury yield curve flattened this year, as the gap between yields on short-term and long-term bonds narrowed.
Since longer-term bonds are typically more sensitive to interest rate changes, there is little advantage to investing in a 10-year Treasury note when the two-year Treasury note is likely to generate only a slightly lower yield, with less interest rate risk. At the end of September, the yield on the two-year Treasury was 2.81%, compared to 3.06% for a 10-year Treasury.2 Last year, investors may have been more tempted to transition their investments to bonds with longer maturities in order to benefit from the greater yields, which is a common investor misstep when yields are rising.
Are you capitalizing on today’s opportunities?
We believe fixed income investments continue to play an important role in a broadly-diversified portfolio. Talk to your financial advisor about how changes in the fixed income market should be applied to your portfolio.
Changing times favor those who prepare. Now is the time to revisit your strategies for fixed income investing.