Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
When you read about interest rates or hear about them on the news, the reference is likely to Treasury interest rates. The Treasury curve is the basis with which the financial world makes comparisons. However, there are many product yield curves, and they don’t always look the same. Just as investor profiles vary, so may the right product for their goals. Investors can be in different federal tax brackets, have unique liquidity needs, be in various junctures of their careers, or possess diverse goals. No two situations are alike, and that is the defining characteristic of individual bonds—the ability to tailor-fit the proper bond for the right investor situation.
The municipal, corporate, and Treasury yield curves are compared in these graphs. All of the product curves feature higher yields than the Treasury curve (purple line). It is easy to see that the municipal yield curve (black-dotted line) currently boasts the steepest shape, albeit for those in the highest federal tax bracket. The longer the maturity, the greater the yield offered to investors. It is also apparent that on the shorter end of the curve (inside ten years), product choice based on yield becomes muddled.
The second graph demonstrates how decision-making can be altered investor-to-investor based on their federal tax bracket. The first graph shows the tax equivalent yields for investors in the highest (37%) federal tax bracket. The second graph reflects tax-equivalent yields based on a 32% federal tax bracket. Investors in this tax bracket may optimize after-tax income with investment-grade corporate bonds with a maturity of ten years or less, as they do not reap the full tax advantage of municipal holders in higher tax brackets.
There is no one-size-fits-all solution when it comes to constructing a fixed income strategy. There are many variables associated with both the investor and the array of fixed income products, but when properly matched, investors can be more assured of optimizing their situation rather than some random target or goal established for the masses. Your Raymond James financial advisor is equipped with the knowledge and resources to demonstrate that fit for you.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.
To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.
